Linn-Benton Community College EC201- Microeconomics By Aaron Jenkins Business Management Linn-Benton Community College Fall 2017

If not here, where would you be?

What’s your opportunity cost?

Opportunity cost = highest valued alternative that must be given up to engage in an activity

better future! As a college grad! Why are you here? A potentially better future! As a college grad!

Which one is the top Economist in the U.S.? B A

Which one is the top Economist in the U.S.? B A Ben Bernanke Federal Reserve Chair 2006-2014 Janet Yellen Federal Reserve Chair 20014 - present

Economic Benefit !?! What economic costs and benefit do smokers provide to non-smokers?

Scope & Purpose of Class Build an understanding of Economics Only an introduction to microeconomic (price theory) topics … and remember I am the messenger and am not advocating political, social, or moral changes to you! … I hope this class will help you to think for yourself!

Why study Economics? Understand better the world you live in, and the forces that shape it Make you a savvier participant in the economy More informed citizen/voter Potential & limits of economic policy

Did you know that ‘Economic Sciences’ is a Nobel Prize category!

Paul Krugman – 2008 Nobel Prize Winner

The ‘kicker’ is that humans create the scarcity situation What is Economics? ECONOMICS: The science of how people, groups, and societies deal with scarcity. GOAL (of economic actors): Achieve happiness in a world of full of constraints. The ‘kicker’ is that humans create the scarcity situation

Contrast with Politics! The process that people use to make decisions in groups. GOAL: Achieve your wants and needs [happiness(?)] from the group setting.

Intertwined So in our discussions this quarter, you will find that you cannot talk about economics without talking about politics. The goals are similar! Economics provides tools to analyze the costs and benefits of choices. Describes how we behave, NOT how we should behave.

Key Distinction Positive Analysis – What is Vs. Normative Analysis – What ought to be Economics  positive analysis where costs and benefits of different policy options are measured

Basic Motivation An economist assumes that a person’s basic motivation is to be happy! Individuals act to make themselves as well off as possible. HOW?  cost-benefit analyses of their decisions What trade-offs do I face? What is my best option given my constraints?

Types of Constraints Resources (e.g., money) Time Technology Opportunity Cost

My Background Lived in Oregon for 6 years 7 different U.S. states 16 different countries Investment Firm Masters in Applied Econ (UWisc-Madison) Environmental Policy Think Tank OR Dept of Fish & Wildlife

My Summer

What about you? Born in Oregon? (Yes or No) Where live currently? (Corvallis, Albany, Lebanon, Sweet Home, Other) Do you work in addition to being student? (Yes or No) How many credits will you take this term? (for example, 12 credits) Do you identify as a Ducks fan, Beavers fan, or Other?

Review Syllabus

How to study the textbook?!?! Chapter Outline & Learning Objectives Section Titles Terms defined in the margins Chapter Summary & Problems

Economics 6th edition Chapter 1 Economics: Foundations and Models

Chapter Outline 1.1 Three Key Economic Ideas 1.2 The Economic Problem That Every Society Must Solve 1.3 Economic Models 1.4 Microeconomics and Macroeconomics 1.5 A Preview of Important Economic Terms Appendix Using Graphs and Formulas

What is this class about? People make choices as they try to attain their goals. Choices are necessary because we live in a world of scarcity. Scarcity: A situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics is the study of the choices people make to attain their goals, given their scarce resources. Economists study these choices using economic models, simplified versions of reality used to analyze real-world economic applications.

Some typical “economics” questions We will learn how to answer questions like these: How are the prices of goods and services determined? How does pollution affect the economy, and how should government policy deal with these effects? Why do firms trade with one another? Why does government control the prices of some goods and services, and what are the effects of those controls?

1.1 Three Key Economic Ideas We interact with one another in markets. Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. In analyzing markets, we generally assume: People are rational People respond to economic incentives Optimal decisions are made at the margin

1. People are rational Economists generally assume that people are rational. Rational: Using all available information to achieve your goals. Rational consumers and firms weigh the benefits and costs of each action, and try to make the best decision possible. Example: Apple doesn’t randomly choose the price of its iPhones; it chooses the price(s) that it thinks will be most profitable.

2. People respond to economic incentives As incentives change, so do the actions that people will take. Example: Changes in several factors have resulted in increased obesity in Americans over the last couple of decades, including: Decreases in the price of fast food relative to healthful food Improved non-active entertainment options Increased availability of health care and insurance, protecting people against the consequences of their actions

Making the Connection: Health insurance and obesity (1 of 2) Obesity is rising in America, for various reasons. Is one of those reasons health insurance?

Making the Connection: Health insurance and obesity (2 of 2) People with health insurance have less incentive to stay healthy than people without health insurance. Holding constant other factors like age, gender, and income, research shows people with health insurance are more likely to be obese. They are responding to economic incentives.

3. Optimal decisions are made at the margin While some decisions are all-or-nothing – e.g., do I open a business or not? -- most decisions involve doing a little more or a little less of something. Example: Should you watch an extra hour of TV, or study instead? Economists think about decisions like this in terms of the marginal cost and benefit (MC and MB): the additional cost or benefit associated with a small amount extra of some action. Comparing MC and MB is known as marginal analysis. Personal example?

1.2 The Economic Problem That Every Society Must Solve Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? In a world of scarcity, we have limited economic resources to satisfy our desires. Therefore we face trade-offs. Trade-off: The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

1. What goods and services will be produced? Individuals, firms, and governments must decide on the goods and services that should be produced. An increase in the production of one good requires the reduction in the production of some other good. This is a trade-off, resulting from the scarcity of productive resources. The highest-valued alternative given up in order to engage in some activity is known as the opportunity cost. Example (Govt): the opportunity cost of increased funding for space exploration might be giving up the opportunity to fund cancer research.

2. How will the goods be produced? A firm might have several different methods for producing its goods and services. Example #1: A music producer can make a song sound good by Hiring a great singer, and using standard production techniques; Hiring a mediocre singer, and using Auto-Tune to correct the inaccuracies.

2. How will the goods be produced? A firm might have several different methods for producing its goods and services. Example #2: As the cost of manufacturing labor changes, a firm might respond by Changing its production technique to one that employs more machines and fewer workers Moving its factory to a location with cheaper labor (e.g., China)

3. Who will receive the goods and services produced? The way we are most familiar with in the United States is that people with higher incomes obtain more goods and services. Changes in tax and welfare policies change the distribution of income; though people often disagree about the extent to which this “redistribution” is desirable.

Types of economies Centrally planned economy: An economy in which the government decides how economic resources will be allocated. Market economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources. Mixed economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. Examples of each?

Efficiency of economies Market economies tend to be more efficient than centrally-planned economies. Market economies promote: Productive efficiency, where goods or services are produced at the lowest possible cost; and Allocative efficiency, where production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Source of economic efficiency Productive efficiency comes about because of competition. Allocative efficiency arises due to voluntary exchange. Voluntary exchange: A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction. Each transaction that takes place improves the well-being of the buyer and seller; transactions continue until no further improvement can take place. Examples?

Caveats about market economies Markets may not result in fully efficient outcomes. For example: People might not immediately do things in the most efficient way Governments might interfere with market outcomes Market outcomes might ignore the well-being of people who are not involved in transactions – ex: pollution

Market economies and equity Economically efficient outcomes are not necessarily the most desirable. Less efficient outcomes may be more fair or equitable. Equity: The fair distribution of economic benefits. Harder to define than efficiency. Can mean different things to different folks. An important trade-off for a government is that between efficiency and equity. Example: If we tax income, people might work less or open fewer businesses; but those tax receipts can fund programs that aid the poor.

1.4 Microeconomics & Macroeconomics Distinguish between microeconomics and macroeconomics Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Table 1.1 Issues in Microeconomics and Macroeconomics

1.5 A Preview of Important Economic Terms (p.17-18) Like all fields of study, economics uses terms or jargon with specific, precise meanings. Sometimes these terms will be used in ways that differ even from closely related disciplines. Examples: Technology: the processes a firm uses to produce goods and services Capital: manufactured goods that are used to produce other goods and services Pay close attention to terms defined in class and in the textbook!

Example In-Class Quiz