copyright © 2012, All rights reserved eStudy.us Introduction to Microeconomics
copyright © 2012, All rights reserved eStudy.us What is the economic problem? Scarcitybut human wants are unlimited Definitions of economics Webster: a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services Mankiw: the study of how society manages its scarce resources Roberson: studies what rational people do when faced with choice : resources on earth are finite
copyright © 2012, All rights reserved eStudy.us Capitalism Markets determine what is produced, how it’s produced and who consumes the output using the market price Business owners may succeed or fail Limited role for government to protect private ownership, to protect Socialism Planning role for government Society ownership (no private property) citizens, and to build common infrastructure Why is most of the world capitalist today? Socialism failed to provide entrepreneur and worker incentives
copyright © 2012, All rights reserved eStudy.us Mankiw’s first four principles People face trade-offs The cost of something is what you give up to get it Rational people think on the margin People respond to incentives Our time is finite; you chose to spend this moment studying economics. What else could you have done: work, study for another class, go to the movies, sleep, play? Given all your time alternatives suppose “working” is the most valued activity you had to forgo to study economics. Thus the “opportunity cost” of studying economics isn’t all the other choices; it’s only missing work. Just before you decided to study economics you had many time alternatives. As a rational person you analyzed the cost-benefit of each choice and properly chose to spend the next moments, on the margin, studying economics. Why are you in university study? For one of the most powerful incentives, to improve you finance position throughout your entire life.
copyright © 2012, All rights reserved eStudy.us Scientific Method Hypothesize Design and test In both physical and social science researcher start with a hypothesis In the physical sciences, physics, researchers test the hypothesis under controlled lab experiments. In the social sciences, economics, researchers don’t have the option to control the subject environment. Economists use mathematical models derived by assumptions models are a simplification of the real world assumptions create the simplified world. Good assumptions will not impact the experiment outcome.
copyright © 2012, All rights reserved eStudy.us Microeconomics the study of how households and firms make decisions and how they interact in markets (Mankiw) Macroeconomics the study of economy wide phenomena, including inflation, unemployment, and economic growth (Mankiw) microeconomics studies topics a business owner can change macroeconomics studies topics a business owner can’t change but must understand for planning What is? A householder buying food at the market: microeconomics Ford planning to purchase a factory: microeconomics Ford planning to exit the auto industry : microeconomics A business planning to purchase a truck: microeconomics The auto industry going away microeconomics
copyright © 2012, All rights reserved eStudy.us Positive Statement Claims that attempt to describe the world as it is (objective view) Normative Statement Claims that attempt to prescribe how the would should be (subjective view) What is? Michael Roberson should be fired: normative Unemployment is 9.5%: positive Unemployment of 9.5% is too high: normative Michael Roberson was fired: positive Positive Analysis attempts to be objective, the scientific method, by removing bias from the research and conclusions
copyright © 2012, All rights reserved eStudy.us Sometimes decision makers don’t lesson to economists The Dr. Romer, Univ. of California at Berkeley Examined if NFL teams punt too often The conclusion was a resounding “Yes” If fact NFL teams should “Never” punt (win more without punting) Results were received and accepted by most all NFL coaches Yet on Sunday, fourth and two, coaches continue to punt Why? Could there be another rational incentive to punt beyond trying to win the game? Yes, at times a punt will not be successful, yielding better field position for an opponent. This creates job risk for the coach often inconsistent with attempting to win the game.
copyright © 2012, All rights reserved eStudy.us Resources used in production Land is the resource provided by nature. Labor is the mental and physical ability of workers to produce goods and services. Capital is the physical plants, machinery, and other equipment used to product goods and services. Entrepreneurship The creative ability of individuals to seek profits by taking risks and combining resources to produce goods and services.