Chapter One Introduction

© 2007 Pearson Addison-Wesley. All rights reserved.2–2 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

© 2007 Pearson Addison-Wesley. All rights reserved.2–3 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)

© 2007 Pearson Addison-Wesley. All rights reserved.2–4 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.

© 2007 Pearson Addison-Wesley. All rights reserved.2–5 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

© 2007 Pearson Addison-Wesley. All rights reserved.2–6 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

© 2007 Pearson Addison-Wesley. All rights reserved.2–7 FIGURE 1.1: Production Possibility Frontier Amount of food per week 4 10 A B Amount of clothing per week 0 312

© 2007 Pearson Addison-Wesley. All rights reserved.2–8 The Production Possibility Frontier –At point B, 4 units of food can be produced and 12 units of clothing Without more resources, points outside the frontier are unattainable –This demonstrates a basic fact that resources are scarce

© 2007 Pearson Addison-Wesley. All rights reserved.2–9 Opportunity Cost The cost of a good or service as measured by the alternative uses that are foregone by producing the good or service

© 2007 Pearson Addison-Wesley. All rights reserved.2–10 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

© 2007 Pearson Addison-Wesley. All rights reserved.2–11 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

© 2007 Pearson Addison-Wesley. All rights reserved.2–12 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.

© 2007 Pearson Addison-Wesley. All rights reserved.2–13 Providence University, Taiwan Sept 15, 2008 Declining MOE Subsidy to Each College Student, Taiwan Source: MOE, Taiwan Public Private (in ten thousands NT$) (Public: US$ 4000) (Private: US$ 600)