1 Introduction to Microeconomics (L11100) Section 1: Introduction School of Economics Dr. C.W. Morgan

2 Outline 1.1What is Economics? 1.2What questions does Economics tackle? 1.3Who are Economists & how do they answer those questions? 1.4Markets in Brief 1.5Summary

3 1.1 What is Economics? Economics is the study of those activities which, with or without money, involve exchange transactions among people Economics is the study of people in their ordinary business of life, earning and enjoying a living Economics is the study of wealth Economics is the study of how to improve society

4 Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. It analyses the costs and benefits of improving patterns of resource allocation (Samuelson, Economics, 10e p 3)

5 Economics is the study of how people and societies deal with scarcity (Morgan, Katz and Rosen Microeconomics p 2) Cant satisfy all our desires thus we have to forgo some things. Economists study the choice decision and provide a value for what is forgone. OPPORTUNITY COST The cost of any activity/good in terms of the next best alternative that has been forgone

6 Opportunity Cost: an Example You have £20 to spend and four items: buy a textbook get a rail ticket save it go for a curry and beers 3 seconds to decide!!

7 Applications French literature pays price as the language of money lures students The Times 12th September 2007 Students opt for education but do so on the basis of subject not simply any old degree Opportunity cost of studying business or economics is literature, arts and culture – thus annoying the French hierarchy

8 US Acts to retain lead with GPS Financial Times 20 th September 2007 Battle between US and EU over exploitation of satellite technology EUs Galileo project lacks enough funds On 19 th September 2.7bn euros switched from agriculture Thus the opportunity cost of the new space-race is helping farmers across the EU

9 1.2 What Questions does Economics Tackle? What to produce/consume? How to produce/consume it? Who benefits from production/consumption? MICRO and MACRO levels

Who are Economists and how do they answer those questions? If all Economists were laid end to end they would not reach a conclusion. George Bernard Shaw An Economist is someone who talks about things he doesnt understand and makes you feel ignorant. Herbert Prochnow Economists spend their time arranging the deck chairs on the Titanic. Ernst Schumacher The one profession where you can gain great eminence without ever being right. George Meany Economists are people who work with numbers but dont have the personality to be accountants. Anon.

11 How do they tackle the questions posed? Simplify problems via assumption - eases handling of problem - emphasises key points - mimics scientific approach Build models to develop theories - need to ensure theories are tested - simplified description of a problem using equations & graphs

12 How Theories Are Developed MAKE ASSUMPTIONS DEDUCE IMPLICATIONS MAKE PREDICTIONS TEST PREDICTIONS PREDICTIONS AGREE WITH FACTS MODEL THEORY THEORY ACCEPTED PREDICTIONS CONFLICT WITH FACTS DISCARD IN FAVOUR OF SUPERIOR ALTERNATIVE MODIFY ASSUMPTIONS

13 Always ensure objectivity POSITIVE or NORMATIVE? 1. UK inflation is higher than in the US. 2. The government is wasting its money on the NHS. 3. British workers are better than Japanese workers. 4. Per head, National Product is lower in France than it is in Kuwait. 5. The government should pay more to the unemployed. 6. UK privatisation has greatly increased the profitability of firms.

Markets in Brief If we are not in a command economy…… How can we be sure the number of cars made equals the number that consumers want? How do we know if the number of financiers needed by the City equals the number who want to be financiers? How do we know we get the right number of loaves each day? Answer: the market decides

15 Price Quantity Supply Demand Pe Qe The Market for Loaves QdQs P1

Summary Economics is the study of choice Key principle of opportunity cost Simplification by assumption Positive at all times Use markets as a basis for analysis