Introduction to Microeconomics Why study Economics? What’s it all about?

What’s it all about? Not: business or finance Not: the stock market Economics examines issues from a social perspective : Social Science Analysis of human behavior Close relative of psychology and sociology Economics = Social Studies + Math

DEFINITION 1. ECONOMICS The study of how individuals & societies allocate limited resources to satisfy unlimited wants The study of how choices are made & coordinated

What’s it all about? SCOPE MACROECONOMICS business cycles unemployment/ employment inflation trade, international markets (global economy) MICROECONOMICS scarcity supply & demand markets consumer producer changes/impacts efficiency technology resources

SCOPE MACROECONOMICS The study of the national economy & the global economy, the way that overall economic variables fluctuate & grow, & the effects of government actions on them. MICROECONOMICS The study of the decisions and interactions of individual people & businesses, & the effects of government regulation & taxes on prices & quantities of goods & services.

DEFINITION 1. ECONOMICS The study of the problems that arise from scarcity, & of the institutions that resolve the inescapable conflicts over the uses of scarce resources.

DEFINITION 2. ECONOMIC RESOURCES: people or things that possess the ability to help produce commodities (goods & services) that people value.

DEFINITION 2. ECONOMIC RESOURCES: i) LAND (natural resources) : sites : productive items on or under the earth’s surface

DEFINITION 2. ECONOMIC RESOURCES: ii) LABOUR :productive people & their efforts to produce goods & services

DEFINITION 2. ECONOMIC RESOURCES: iii) PHYSICAL CAPITAL all human made items used to produce goods & services. (produced means of production) ie: Computers and Factories not: Money

DEFINITION 2. ECONOMIC RESOURCES: iv) HUMAN CAPITAL characterization of the education and training of workers (productivity of workers) ie: years of university or years of job experience or innate ability

DEFINITION 2. ECONOMIC RESOURCES: v) Other: ENTREPRENEURIAL ABILITY :the innovator, the risk bearer, the initiator

RETURNS TO RESOURCES Rent, Wages, Interest, Profit: Rent is income earned by land Wages are income earned by labour Interest is income earned by capital Profit is income earned by entrepreneurs

DEFINITION 3. Scarcity ‘scarcity’ scarce (limited) resources Peoples’ wants are greater than the economy’s ability to produce desirable goods & services ‘scarcity’ scarce (limited) resources unlimited wants (always want more) Scarce Resources + Unlimited Wants = Choice

Scarcity  CHOICES 1.)What do we do with our scarce resources? 2.)How do we make the best use of our resources? (Efficiency) 3.)For Whom will things be produced? (Who will get what is available?) (Equity)

Basics 2.) Economic Reasoning Choices made under conditions of scarcity involve tradeoffs: advantages and disadvantages: costs and benefits: incentives and disincentives. Economic reasoning is making decisions by comparing costs and benefits.

Costs and Benefits The relevant costs and benefits to economic reasoning are the expected incremental or additional costs incurred and the expected incremental or additional benefits of a decision That is only the costs and benefits that will be affected by the decision are considered ADDITTIONAL costs or ADDITIONAL benefits

Marginal Cost, Marginal Benefit M.C.(marginal cost) is the extra cost associated with the additional activity…. M.B.(marginal benefit) is the extra benefit associated with the additional activity…. $’s are used to measure these in order to facilitate comparisons

No Sunk Costs Sunk Costs Have already been incurred and will not change as a result of the decision you are about to make. Represent past decisions. Are therefore not counted in a cost benefit decision Ie: Cost of factory, rental costs, training costs, membership costs

ECONOMIC DECISION MAKING RULE: (COST/BENEFIT) If the benefits of an action exceed the costs DO IT If the costs of an action exceed the benefits DON’T DO IT In the case of more than one alternative CHOOSE THE ACTION WITH THE GREATEST NET ADVANTAGE

Opportunity Cost The basis of economic cost benefit analysis When a choice is made in favour of one alternative, another alternative is given up The next best alternative that is given up when a choice is made is called the opportunity cost of the choice.

THE OPPORTUNITY COST of an action is the next best foregone alternative.

Cost Benefit Exercise: Example of economic decision making in action: Should I Go To University? Consider the “marginal” costs: and the “marginal” benefits of this decision. Consider the Opportunity Cost

Opportunity Cost Example Cost of 1 year of University: Tuition: $5000 Books: $500 Opportunity Cost of 1 year University: 40 hr/week, 50 weeks/year, $20/hour $40,000 Total University Cost: $45,500