Principles of Microeconomics Chapter 1 The Scope and Method of Economics

1.1 What is economics? Economics: the study of allocation of scare resources to satisfy unlimited wants. Assumptions: 1st: we have scarce resources, e.g. Bill Gates has time constraint (24 hours a day) 2nd: we have unlimited wants, e.g. Bill Gates want to alleviate world poverty

1.1 What is economics? Question: how does economics satisfy these unlimited wants? -- Developing markets Market: an institution through which buyers and sellers interact and engage in exchange or trade. Note: needs VS wants Needs= Wants

1.2 The Scope of Economics Microeconomics: the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choice. Macroeconomics: the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

1.3 The Method of Economics Positive economics: is concerned with what is. It attempts to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. Normative economics: is concerned with what ought to be. It evaluates outcomes of economic behavior as good or bad. It involves judgments and prescriptions.

1.3 The Method of Economics Some Examples What determines the wage rate for unskilled workers? --Positive economics What would happen if we abolished the corporate income tax? Should the government regulate the wage rate? --Normative economics Should we abolish the corporate income tax?

1.3 The Method of Economics Descriptive economics: is the compilation of data that describe phenomena and facts, e.g. ATUS --Positive economics Economic theory: attempts to generalize about data and interpret them, e.g. law of demand

1.3 The Method of Economics Ceteris Paribus ( all else equal) : all other things being equal. This assumption is used to single out the effect attributed to a change in a single variable Example1- what would my grade have been if I studied one more hour, ceteris paribus? Factors to affect grades: class attendance, study time With CP, only grade and study time are discussed Example2- law of demand

1.4 Common Fallacies The Post Hoc Fallacy (after this, therefore because of this): a common error made in thinking about causation: if event A happens before event B, it is not necessarily true that A caused B. The form: 1. A occurs before B 2. Therefore A is the cause of B

1.4 Common Fallacies The Post Hoc Fallacy EX 1: John is scratched by a cat while visiting her friend. Two days later she comes down with a fever. John concludes that the cat's scratch must be the cause of her illness. EX 2: Peter purchases a new Mac and it works fine for months. He then buys and installs a new piece of software. The next time he starts up his Mac, it freezes. Peter concludes that the software must be the cause of the freeze.

1.4 Common Fallacies The fallacy of Composition: to conclude that what is true for a part is necessarily true for the whole. Example: A tiger eats more food than a human being. Therefore, tigers, as a group, eat more food than do all the humans on the earth

1.5 Efficiency vs. Equity Efficiency will be a major theme for the course that will be developed in many contexts such as Consumer/producer problems Perfect competition Market and government intervention For now, consider efficiency as something that provides the greatest benefit (utility, profit, welfare) while incurring the smallest cost (harm, expenditure, loss)

1.4 Efficiency vs. Equity Equity has implications with normative economics. How do we define what is fair?