MICROECONOMICS: 4 Rebecca Tuttle Baldwin 4 Spring An Introduction

What is economics about? Study of CHOICES Economics is a social science

3 4 Economics is the painful elaboration of the obvious. 4 An economist is someone who doesn't know what he's talking about - and make you feel it's your fault. 4 Economists are people who are too smart for their own good and not smart enough for anyone else's.

4 Microeconomics 4 Focus on individual economic agents 4 Applied in market setting –Goods –Factors 4 Consumer, producer, and government

5 “The Market” 4 Can be but need not be a physical interaction 4 Arrangement through which “buyers” and “sellers” carry out exchange

6 Why do we want to exchange?

7 Premise 4 Unlimited wants (no bliss point) 4 Limited resources/time (scarcity) 4 Hence choices have to be made

8 Resources/Inputs/Factors of Products 4 Land (raw, unimproved with inherent natural resources) RENT 4 Labor WAGE 4 CAPITAL (intermediate goods used in production) INTEREST 4 Entrepreneur/Risk-taker PROFIT

9 Perspective/Analysis 4 Normative (value, judgment, hard to test) 4 Positive (objective, relates links or cause/effect, can be verified or tested) 4 Robert J. BARRO in his 1989 paper in the Journal of Economic Perspectives: "A colleague of mine argues that a 'normative' model should be defined as a model that fits the data badly."

10 Opportunity Cost 4 Fundamental concept 4 Value of the foregone alternative 4 Can only arise in a world where available resources are limited so all wants cannot be satisfied…clearly, if resources were limitless, no action would be taken at expense of other and value of “next best” would be 0!

11 Economics Operates on the Margin 4 Actions are done in increments 4 Choice tends to be decided on the change or addition in cost and benefits 4 Sunk costs –costs that cannot be recovered…hence have no bearing on decision (Life can only be understood backwards, but it must be lived forwards. -Kierkegaard )

12 Models (story) 4 By definition, a simplification of the “real world” 4 Part art, part science 4 Objective function (goal), variables (players), equations (relationships) 4 All models are wrong but some are useful. -George Box

13 Partial Analysis 4 Hold some actions outside of the focus of the analysis 4 “ceteris paribus” 4 Holding all else equal, nothing else changing

14 Common errors in our reasoning 4 Post Hoc fallacy. Just because one event follows after a first event, doesn’t mean the first caused it 4 Correlation doesn’t prove causation 4 Fallacy of composition

15 Adam Smith, 1700s 4 Inquiry into the Wealth of Nations 4 “invisible hand” 4 Market forces, government forces 4 Command, market, mixed 4 Capitalism, socialism, communism 4 What’s “best”….benchmarks 4 Efficiency, equity, growth, stability