© 2008 Pearson Addison Wesley. All rights reserved Chapter One Introduction

© 2008 Pearson Addison Wesley. All rights reserved. 1-2 Chapter Outline 1.1Microeconomics: The Allocation of Scarce Resources a.Trade-Offs b.Who Makes the Decisions c.Prices Determine Allocations d.How Prices Determine Allocations 1.2Models a.Simplifications by Assumption b.Testing Theories c.Maximizing Subject to Constraints d.Positive Versus Normative 1.3Uses of Microeconomic Models a.Uses of Microeconomics by Individuals and Governments

© 2008 Pearson Addison Wesley. All rights reserved. 1-3 What is Microeconomics? Economics –The study of the allocation of scarce resources among alternative uses Microeconomics –The study of the economic choices individuals and firms make to allocate the scarce resources and how those choices create markets

© 2008 Pearson Addison Wesley. All rights reserved. 1-4 Economic Models Simple theoretical descriptions that capture the essentials of how the economy works –Used because the “real world” is too complicated to describe in detail –Models tend to be “unrealistic” but useful While they fail to show every detail (such as houses on a map) they provide enough structure to solve the problem (such as how a map provides you with a way to solve how to drive to a new location)

© 2008 Pearson Addison Wesley. All rights reserved. 1-5 Economic Models Simplifications by assumption –Regardless of how the model is described, an economic model is a simplification of reality that contains only its most important features. Testing theories –Economic theory is the development and use of a model to test hypotheses, which are predictions about cause and effect.

© 2008 Pearson Addison Wesley. All rights reserved. 1-6 Maximizing subject to constraints –A key assumption in most microeconomic model is that individuals allocate their scarce resources so as to make themselves as well off we possible Positive versus normative –positive statement testable hypothesis about cause and effect. –normative statement conclusion as to whether something is good or bad Economic Models

© 2008 Pearson Addison Wesley. All rights reserved. 1-7 Example  Which of the following is an example of a positive statement? A) Since this good is bad for you, you should not consume it. B) If this good is bad for you, you should not consume it. C) If you consume this good, you will get sick. D) None of the above.

© 2008 Pearson Addison Wesley. All rights reserved. 1-8 The Production Possibility Frontier A graph showing all possible combinations of goods that can be produced with a fixed amount of resources Figure 1.1 shows a production possibility frontier where the goods are food and clothing produced per week –At point A, 10 units of food and 3 units of clothing can be produced –At point B, 4 units of food can be produced and 12 units of clothing

© 2008 Pearson Addison Wesley. All rights reserved. 1-9 FIGURE 1.1: Production Possibility Frontier Amount of food per week 4 10 A B Amount of clothing per week 0 312

© 2008 Pearson Addison Wesley. All rights reserved The Production Possibility Frontier Without more resources, points outside the frontier are unattainable –This demonstrates a basic fact that resources are scarce

© 2008 Pearson Addison Wesley. All rights reserved Opportunity Cost The cost of a good or service as measured by the alternative uses that are foregone by producing the good or service

© 2008 Pearson Addison Wesley. All rights reserved FIGURE 1.1: Production Possibility Frontier Amount of food per week A B Opportunity cost of clothing = ½ pound of food Opportunity cost of clothing = 2 pounds of food 2 Amount of clothing per week

© 2008 Pearson Addison Wesley. All rights reserved Uses of Microeconomics While the uses of microeconomics are varied, one useful way to categorize is by types of users –Individuals making decisions regarding jobs, purchases, and finances –Businesses making decisions regarding the demand for their product or their costs –Governments making policy decisions regarding laws and regulations

© 2008 Pearson Addison Wesley. All rights reserved APPLICATION : Is It Worth Your Time to Be Here? The typical U.S. college student pays about $18,000 per year in tuition, fees, and room and board charges. One might conclude then, that the “cost” of 4 years of college is about $72,000. -A number of studies have suggested that college graduates earn more than those without such an education.

© 2008 Pearson Addison Wesley. All rights reserved Providence University, Taiwan Sept 15, 2008 Declining MOE Subsidy to Each College Student, Taiwan 教育部補助每大學生經費 Source: MOE, Taiwan Public Private (in ten thousands NT$) (Public: US$ 4000) (Private: US$ 600)

© 2008 Pearson Addison Wesley. All rights reserved 各級學校平均每生分攤經費 學年度 專科學校 33,65841,04154,62254,12456,26056,88864,68948,06655,549 大學及獨立學院 61,00679,88995,63283,25689,70497,666119,285142,284140,782 學年度 專科學校 64,21566,05078,02781,72985,95483,78687,792100,09692,192 大學及獨立學院 161,547188,484200,211204,730204,795195,870198,611213,401171,730 學年度 專科學校 95,998109,25391,499116,784113,948140,618131,820121,804104,737124,889 大學及獨立學院 160,713162,184169,906152,275158,866160,950165,178173,195175,263182,913

© 2008 Pearson Addison Wesley. All rights reserved 各級學校平均每生分攤經費

© 2008 Pearson Addison Wesley. All rights reserved 各級學校平均每生分攤經費 _ 平減民國 95 年消費者物價指數 學年度 專科學校 52,45962,13681,58680,86784,18484,54295,63770,15977,658 大學及獨立學院 95,084120,952142,841124,393134,227145,142176,353207,684196,815 學年度 專科學校 86,20685,57996,77298,46999,47293,53295,085107,43497,321 大學及獨立學院 216,871244,214248,308246,663237,004218,654215,110229,045181,284 學年度 專科學校 101,157113,69995,232121,790119,168144,714132,602121,804102,885118,502 大學及獨立學院 169,350168,783176,838158,801166,143165,637166,158173,195172,164173,559

© 2008 Pearson Addison Wesley. All rights reserved 各級學校平均每生分攤經費 _ 平減民國 95 年消費者物價指數