1 Unit 1 - Introduction to Microeconomics Economics is broken up into 2 Segments: 1) Microeconomics - studies the behavior of individual economic entities such as the Consumer, Firm, and Worker, households. 2) Macroeconomics - studies the behavior of the SUM TOTAL of all individuals in society; Consumer Sector, Business Sector, Labor Force, Nations.

COVERING SOME OF THE BASICS Unit 1 2

3 Why Study Economics? 1) To Learn a Way of Thinking about Society and our World. 2) To Understand Global Issues. 3) To Be an Informed Voter.

4 Terminology 1) Economic Theory - a statement about the cause and effect of a given occurrence. Example: An increase in the price of gas will cause people to drive less. Other Examples?

Examples of Economic Theories Increase in the number of fast-food restaurants results in lower prices and higher quality Increase in the interest rates results in increase in savings If consumer spending increases, GDP increases. If the price of beef goes up, consumer demand for poultry increases. 5

“You can’t always get what you want” 2) Scarcity - this occurs when there is a finite amount of something available. All resources (land, labor, capital) are considered to be scarce. Examples: trees, oil, income, time, books in the library, etc. 6

Economics Studies Best Decisions with Scarce Resources Scarcity drives all our decision-making and our behavior because we have to CHOOSE –A new pair of shoes or books for class –Should the govt. product more submarines or build space ships to go to Mars 7

Terminology cont. 3)Economic Resources – anything provided by nature or previous generations that can be used to satisfy human wants. In economics, we classify resources as to fitting into one of 4 types: –Land –Labor –Capital –Entrepreneurship 8

Resource -Labor (L) Collective size and effort of a nation Labor Force 9

Resource- Capital (k) This is different than capital - $ Manufactured productive assets in a nation –Buildings –Tools –Machinery 10

Resource – Land (l) A nations stock of minerals, timber, fisheries, water 11

Entrepreneurship (or technology:A) Nations ability to creatively combine land, labor, and capital to produce goods and services 12

Resources cont. Example: Lemonade Stand Output – Lemonade Resources (Inputs) – lemons, water, pitcher, sugar, water, sign. 13

Resources cont. How are the resources for the Lemonade Stand classified into Land, Labor, and Capital? 14

Is Cash a Resource? No. Why? 15

Terminology cont. 4) Explicit Cost - money spent on a good or service. Example: You spend $1.00 to purchase an Ice Tea. 8) Opportunity Cost – the highest valued alternative that must be forgone when another alternative is chosen. Example: The opportunity cost of studying is the fun you can have going out with friends. 16

Opportunity Cost 5) Opportunity Cost – the highest valued alternative that must be forgone when another alternative is chosen. Example: The opportunity cost of studying is the fun you can have going out with friends. You measure opportunity cost the price of the product or experience – ie. Explicit cost 17

Opportunity Cost cont. Example: The opportunity cost of going to college is the income you could have earned by working. Other Examples? 18

Terminology cont. 6) Economic Cost – the sum of Explicit Costs and Opportunity Costs. Example: What is the Economic Cost of going to Aruba over Spring Break? Explicit Costs: Opportunity Costs: 19

Terminology cont. 7) Rationality - this is a major assumption in economics. This occurs if you act in a manner which maximizes your own self interest or “utility” –Utility describes happiness, usefulness, or economic benefits Benefits > Costs. –Provides most happiness > Provides unhappiness Every decision you make is rational because you would never do something if the costs outweighed the benefits. Always looking for net benefit 20

Rationality cont. Example: Buying a new car: Benefit - It runs well, you like how it looks. Cost - Money spent. Example: Attending class: Benefit - Learn something, getting notes. Cost - Being bored, the opportunity cost of what else you could be doing; spending time with friends, sleeping, etc. 21

Rationality cont. In economics we assume everyone is rational. You would never choose to do something unless the benefits of doing so were at least as great as the costs. You are always weighing the benefits and costs of every decision you make whether you realize it or not! 22

When does a consumer make an irrational decision? If the information they have is incomplete or flawed –Smoking cigarettes –Spraying DTC in your garden 23

Marginal Analysis Assume people make decision to maximize their net benefit –Ie. Benefit > Cost This is not done all at once but in steps. Each step is an additional benefit from the step before In economics, we count each step as a unit and apply a value 24

Marginal Analysis cont. The next unit is referred to as the “marginal benefit” A unit could also be a cost or a “marginal cost” 25

Marginal Benefit and Marginal Cost of buying a Porsche # of Porsche’s bought Marginal Benefit Marginal Cost Net BenefitShould I buy it? 1$100,000$50,000 Yes 2$80,000$50,000$30,000Yes 3$50, Yes 4$30,000$50,000-$20,000No 5$10,000$50,000-$40,000No 26

At the Margin At the third Porsche, I’ve bought “at the margin” My total benefit is maximized Why do you think this is an important concept? 27

Terminology cont. 9) Ceteris Paribus - all else is held constant. Usually this is stated after an economic theory is proposed. Example: An increase in the Price of gas causes people to drive less, holding all other variables that could affect driving constant. 28

Efficiency 10) Efficiency - in economics, this occurs when firms and/or the economy produce what people want at the lowest cost possible. Example: Suppose Jake owns an Ipad but wants a Mini Ipad and John owns a Mini Ipad but wants a regular Ipad. If they engage in trade, the outcome is efficient. 29

Efficiency cont. Example: Suppose Idaho was better suited to produce potatoes and Kansas was better suited to produce corn. What if there was a law stating Idaho can only produce corn and Kansas can only produce potatoes, the result would be inefficient. Example: If a town’s population were all vegetarians and half of the town’s resources were used to produce meat, the end result is inefficient. 30

31 Terminology cont. 11) Sunk Costs - costs that can not be recovered once they have been incurred. Example: Suppose you spend $10 on a Pizza. You take a bite and it has a bad taste. Should you eat it since you spent $10?

Sunk Costs cont. That $10 is Sunk and should be ignored when making a decision. What matters now are the future costs you will incur from continuing to eat the Pizza. Example: You have tickets to a football game that is a 1 hour drive away. There is a terrible blizzard outside. Do you go to the game since you already spent money on the tickets? 32