ESSENTIALS OF MICROECONOMICS ECONOMICS 201

ESSENTIALS OF MICROECONOMICS ECONOMICS 201

How can you find…or avoid me??
Where am I? BDC 230 How to contact me… or Office Hours… MW 12:00 pm – 2:00 pm F 1:00 pm – 2:00 pm By appointment

What is Microeconomics?
Two parts: Study of the behavior of the individual Study of the behavior of the firm What type of Behavior? Consumer Buying and working Firm Producing and selling

What are some major changes in the economy that have happened in the last six months?

Objectives Role of prices Supply and Demand Why do we have prices?
How are prices determined? Who determines prices? Supply and Demand What are they? How do we draw them? What changes each?

Differing market Characteristics
Competitive markets What makes us competitive? Sports…football vs. tennis Differing market Characteristics Control over prices Number of firms/customers Analyze real-life situations Why did the minimum wage change? Why are gas prices increasing again? Why do businesses have sales? Why do doctor visits cost so much?

Microeconomics 7th edition Roger Arnold
Textbook Microeconomics 7th edition Roger Arnold

Attendance Policy Two phrases to live by:
If you don’t want to be here…we don’t want you here If you don’t plan on staying the entire time…don’t come

Homework Due at the BEGINNING of class following the assigned questions Homework review sessions Students do problems Answer need not be correct to receive credit Grading of homework…What is your number? Don’t forget it…your grade depends on it

Exams and Quizzes Midterm Quiz 1 Quiz 2 Final Monday February 6th
Friday January 20th Quiz 2 Friday February 24th Final Section 03 Friday March 17th 8:00am - 10:30am Section 04 Wednesday March 15th 2:00pm – 4:30pm

Grade Breakdown Midterm = 25% Cumulative Final = 30% Quizzes= 20%
Homework = 15% Participation = 10%

Other Stuff… Academic Dishonesty Classroom Conduct Disabilities

Chapter 1 What is Economics About

Definition of Economics
SCIENCE of how individuals and societies deal with the fact that wants are greater than resources available to satisfy those wants

Scarcity Wants are greater than the resources available to fill those wants What do you have scarcity of??? Money Time What do firms have scarcity of??? Labor Land Capital

Thus…. Economics is the SCIENCE of SCARCITY

Normative vs. Positive Economics
What “ought” to be Positive What is

Examples: Positive or Normative?
The government fought inflation during the early 1980s because it felt the inflation was damaging potential long-term economic growth. The government should cut taxes in order to stimulate consumption. Increases in consumer spending improved the Japanese economy last year. Balancing the federal budget would be good for the economy.

Micro vs. Macro Microeconomics Macroeconomics
Study of human behavior and choice Looks at SMALL units (individual, market, single firm) Macroeconomics Study of human behavior and choices Looks at LARGE units (aggregated markets, whole economy)

Economic Way of Thinking
Watch “An economist is someone that sees something working in practice and asks if it would would in principle” Think Identify

Why Study Economics? Social Problems Understand why things happen
Discrimination Crime Understand why things happen Coupons Minimum Wage Understand the Political Process

Homework #1 Chapter 1 Questions 1 and 2

Beginning to Think Like an Economist
…is this a good thing?

Defining Economic Goods
Utility Satisfaction you receive from consuming a product Good vs. Bad Tangibility Can the good be touched or is it a service? Resources or factors of production used Land: natural resources Labor: Physical and mental talents of people Capital: produced goods that can be used as inputs for further production Entrepreneurship: talent of organizing resources, seeking new opportunities, and developing new ways of doing things

Remember Scarcity Runs the Show…
What was scarcity?? So…how do we make sure that only those who REALLY need the good get it?? Prices System of rationing of the good Cause people to compete for the item

Opportunity Cost Value of the next best alternative foregone
Pizza vs CD Pizza for $1.00 per slice; CD for $15.00 Revolutionary War The British and their red coats Big Macs Big Macs in Japan cost $8.25 Highway System Paid for with taxes

Summary Statement of Scarcity
and Related Concepts

Costs and Benefits at the Margin
What is the margin?? The “last” or “additional” Marginal Cost The cost of the “last” unit employed Marginal Benefits The benefit of the “last” unit employed Unintended effects Minimum wage Gun bounties Seat belts

Efficiency What is the “right amount” of time to study?
Right amount = optimal or efficient amount Marginal Costs = Marginal Benefits

Economic way of thinking includes…
Analyzing scarcity Look at opportunity cost of decisions Measure costs and benefits Look at marginal effects Examine unintended effects

Economic Thinking Errors
Association vs. Causation You hit red lights because you are running late Don’t study for a test so you fail Fallacy of Composition What is good for the individual is good for the group Forgetting Ceteris Paribus All else remains constant

What is this?

Model Simplified version of reality Why is a model necessary??
Includes only the “important” aspects Why is a model necessary??

Parts of a Theory Variables Assumptions Hypothesis Predictions
Magnitudes that can change Assumptions Ideas about event that will not allow to change Hypothesis Educated guess Predictions Based on hypothesis and assumptions

Scientific Approach What do you want to predict/explain?
What variables are important? State assumptions State hypothesis Test If results are good…Yeah You!! If results are bad…amend or reject theory

Building and Testing a Theory

How do we judge theories?
Look at how well they predict NOT by the assumptions Example: Firms try to maximize profits Do they think about this every second? Probably not Over the course of the year…make decisions to maximize profits

Appendix A Working with Diagrams

Types of Relationships between variables
Direct Positive Inverse Negative No Relationship Variables are independent

Two-Variable Diagram Representing an Inverse Relationship

Two-Variable Diagram Representing a Direct Relationship

Two Diagrams Representing Independence between Two Variables

Slope Used to see how a variable changes in response to another variable changing

To calculate slope Find two points on any straight line

What sign do you expect the slope to have?
Direct relationship Positive Inverse relationship Negative No Relationship 0 or infinity

Calculating Slopes

The 45 Line

Chapter 1 Appendix Homework Chapter 1 Questions 4, 5, 7, 8

Do we understand Chapter 1?
In-class exercise 1 Do we understand Chapter 1?

Should you major in Economics??
Appendix B Should you major in Economics??

Five myths about economics and an economics major
Economics is all mathematics and statistics Economics is only about inflation, interest rates, unemployment, and other such things People become economists only if they want to “make money” Economics wasn’t very interesting in high school, so it isn’t going to be interesting now Economics is a lot like business, but business is more marketable

Morning Session Homework #1
Chapter 1 Question 1: Tracy Bertagnole Question 2: Anthony Juarez Alternates: Marisela Enciso and Corbyn Ladd MAKE SURE TO PUT YOUR NUMBER NOT YOUR NAME ON YOUR HOMEWORK!! ALSO PUT YOUR NUMBER ON THE PAPER YOU ARE GRADING!!

Afternoon Session Homework #1
Chapter 1 Question 1: Clinton Huff Question 2: Lizbeth Medina Alternates: Carly Elder and Sophie Laureano MAKE SURE TO PUT YOUR NUMBER NOT YOUR NAME ON YOUR HOMEWORK!! ALSO PUT YOUR NUMBER ON THE PAPER YOU ARE GRADING!!

Beginning to Think Like an Economist
…is this a good thing?

Utility Satisfaction you receive from consuming a product Good vs. Bad Tangibility Can the good be touched or is it a service?

Resources or factors of production used Land: natural resources Labor: Physical and mental talents of people Capital: produced goods that can be used as inputs for further production Entrepreneurship: talent of organizing resources, seeking new opportunities, and developing new ways of doing things

Remember Scarcity Runs the Show…
What was scarcity?? So…how do we make sure that only those who REALLY need the good get it?? Prices System of rationing of the good Cause people to compete for the item

Opportunity Cost Value of the next best alternative foregone
Pizza vs CD Pizza for $1.00 per slice; CD for $15.00 Revolutionary War The British and their red coats

Opportunity Cost Big Macs Highway System Big Macs in Japan cost $8.25
Paid for with taxes

Summary Statement of Scarcity
and Related Concepts

Costs and Benefits at the Margin
What is the margin?? The “last” or “additional” Marginal Cost The cost of the “last” unit employed Marginal Benefits The benefit of the “last” unit employed Unintended effects Minimum wage Gun bounties Seat belts

Efficiency What is the “right amount” of time to study?
Right amount = optimal or efficient amount Marginal Costs = Marginal Benefits

Economic way of thinking includes…
Analyzing scarcity Look at opportunity cost of decisions Measure costs and benefits Look at marginal effects Examine unintended effects

Economic Thinking Errors
Association vs. Causation You hit red lights because you are running late Don’t study for a test so you fail Fallacy of Composition What is good for the individual is good for the group Forgetting Ceteris Paribus All else remains constant

What is this?

Model Simplified version of reality Why is a model necessary??
Includes only the “important” aspects Why is a model necessary??

Parts of a Theory Variables Assumptions Hypothesis Predictions
Magnitudes that can change Assumptions Ideas about event that will not allow to change Hypothesis Educated guess Predictions Based on hypothesis and assumptions

Scientific Approach What do you want to predict/explain?
What variables are important? State assumptions State hypothesis Test If results are good…Yeah You!! If results are bad…amend or reject theory

Building and Testing a Theory

How do we judge theories?
Look at how well they predict NOT by the assumptions Example: Firms try to maximize profits Do they think about this every second? Probably not Over the course of the year…make decisions to maximize profits

Appendix A Working with Diagrams

Types of Relationships between variables
Direct Positive Inverse Negative No Relationship Variables are independent

Two-Variable Diagram Representing an Inverse Relationship

Two-Variable Diagram Representing a Direct Relationship

Two Diagrams Representing Independence between Two Variables

Slope Used to see how a variable changes in response to another variable changing

To calculate slope Find two points on any straight line

What sign do you expect the slope to have?
Direct relationship Positive Inverse relationship Negative No Relationship 0 or infinity

Calculating Slopes

The 45 Line

Chapter 1 Appendix Homework Chapter 1 Questions 4, 5, 7, 8

Should you major in Economics??
Appendix B Should you major in Economics??

Five myths about economics and an economics major
Economics is all mathematics and statistics Economics is only about inflation, interest rates, unemployment, and other such things People become economists only if they want to “make money” Economics wasn’t very interesting in high school, so it isn’t going to be interesting now Economics is a lot like business, but business is more marketable

Chapter 2 Economic Activities: Producing and Trading

Efficiency Efficiency of Production is goal
If a firm is producing the max possible given available resources and technology

Production Possibility Frontier (PPF)
Shows all possible combinations of goods for a particular economy at a particular point in time, given its resources and technology constraints

Production Possibilities Frontier for Grades

Where are we on the PPF? Can we be on the PPF?
Yes! efficient Can we be under the PPF? Inefficient Can we be over the PPF? NO

Two types of Production Possibility Frontiers
Constant Opportunity Costs STRAIGHT LINE DOWNWARD SLOPED (inverse relationship) 1 to 1 relationship (slope constant)

Production Possibilities Frontier (Constant Opportunity Costs)

Second Type of PPF Changing Opportunity Costs BOWED OUT PPF
Real world PPF Changing slope with every point

Production Possibilities Frontier (Changing Opportunity Costs)

Law of Increasing Opportunity Costs
Goes along with CHANGING OPPORTUNITY COSTS As more of a good is produced the opportunity cost to produce that good increases.

A Summary Statement about Increasing Opportunity Costs and a Production Possibilities Frontier That Is Bowed Outward (Concave Downward)

Economic Concepts illustrated by PPF
Scarcity Choice Opportunity Costs Law of Increasing Opportunity Costs

Examples of Law of Increasing Opportunity Costs
Armed Services For the Civil War those with high amounts of human capital (doctors, engineers…) were given an exemption from the draft WWI, WWII and Korean War draft was irrelevant of job or education level. Home Improvements Swedish men make more improvements themselves compared to US men

Economic Growth Increase in resources Increase in technology
Shift of PPF outward

How would each of the following affect the US PPF?
A rise in the unemployment rate The invention of the computer An increase in the number of births in the United States An increase in the number of births in Russia

Economic Growth within a PPF Framework

Can we draw a PPF??? A Bloody Mary contains tomato juice and two shots of vodka. A screwdriver contains orange juice and one shot of vodka. Assume we have plenty of orange juice and tomato juice, but only 1 small bottle of vodka containing 6 shots. Draw a graph with Bloody Marys on X-axis and screwdrivers on the Y-axis. On your graph show all possible combinations of Bloody Marys and screwdrivers that could be made, given a small bottle of vodka. How many Bloody Marys could we make if we only made Bloody Marys? How many Screwdrivers could we make if we only made Screwdrivers? Can we make 6 of both drinks? Why or why not?

Production Possibilities Frontier for Grades

More Hours of Study Shifts the Production Possibilities Frontier

Efficiency…Again Produce max amount possible given resources and technology ON PPF – EFFICIENT UNDER PPF – INEFFICIENT OVER PPF – NOT POSSIBLE

Unemployment Economy is not producing the maximum output given the resources and technology available Efficient? On, over, or under PPF?

Efficiency Criterion Will alternate arrangements of resources or goods make at least one person better off without hurting someone else? Yes? Inefficient No? Efficient

Efficiency, Inefficiency, and Unemployment Resources, within a PPF Framework

Trade or exchange Process of giving up one thing for something else
Why would you trade? Make yourself better off Give up something that you value less for something you value more Example: a leather jacket is $100…what does this show?? Value the $100 less than you value the jacket

Periods relevant to trade
Before the trade takes place Ex ante Decision takes place  $2000 of other goods or the $2000 television set? Which makes me better off? At the point of the trade The $2000 changing hands After the trade Ex post No guarantee that trade will meet expectations Buyers remorse

Benefits of Trade Compare the consumer’s and producers point of views
Consumer Surplus Maximum buying price – price paid Satisfaction gained by not having to pay as much Producer Surplus Price received – minimum selling price Satisfaction gained by getting more than anticipated for the good

Which makes you better off?
Increases in Consumer or Producer Surplus? Consumer Why? Price that you pay will be lower

Terms of Trade Trade is where things are given up to get something else What things? Money, goods, services… Terms of trade is how much is given up Which part does buyers remorse fit into? terms of trade Where the money usually comes in

Costs of Trade Transaction costs Third-party effects
Time and effort needed to search out, negotiate, and consummate a trade May cause trades to not take place Don’t know about the good Shipping costs are too high Don’t like to work with salesperson Third-party effects Impacts of trade on parties not immediately involved Second hand smoke (negative externality)

Chapter 2 Economic Activities: Producing and Trading

Costs of Trade Transaction costs Third-party effects
Time and effort needed to search out, negotiate, and consummate a trade May cause trades to not take place Don’t know about the good Shipping costs are too high Don’t like to work with salesperson Third-party effects Impacts of trade on parties not immediately involved Second hand smoke (negative externality)

Producing and trading Two people: Elizabeth and Brian
Each produce two goods: Bread and Apples Elizabeth  10 loaves of bread and 10 apples Brian  5 loaves of bread and 15 apples Elizabeth Apples Elizabeth Bread 20 10 Brian Apples Brian Bread 10 15 5 30

Comparative Advantage
Should both produce apples and bread or should they specialize? What does specialize mean? Produce the good that you do best Produce at a lower costs than other person(s) can Called comparative advantage Looks at opportunity cost What was that? What you have to give up Give up less?? Have the comparative advantage

What are the opportunity costs?
Elizabeth If give up 10 apples how much more bread can she produce? 10 units If give up 10 loaves of bread how many more apples can she produce? Opportunity Costs 10 Bread = 10 Apples 1 Bread = 1 Apple Elizabeth Apples Elizabeth Bread 20 10

What are the opportunity costs?
Brian If give up 15 apples how much more bread can he produce? 5 units If give up 5 loaves of bread how many more apples can he produce? 15 units Opportunity Costs 5 Bread = 15 Apples 1 Bread = 3 Apples 1/3 Bread = 1 Apple Brian Apples Bread 10 15 5 30

Should we specialize? Elizabeth Brian Who produces apples cheaper?
1 Bread = 1 Apple Brian 1 Bread = 3 Apples 1/3 Bread = 1 Apple Who produces apples cheaper? What does cheaper mean? Lower opportunity cost (give up less) Brian!!! Give up only 1/3 loaves of bread Who produces bread cheaper? Elizabeth!!! Give up only 1 apple

Here is the deal Elizabeth produces only bread (20 loaves)
Brian produces only apples (30 apples) Trade 8 loaves of bread for 12 apples Breakdown of end result Elizabeth Bread? 12 loaves ( traded) Elizabeth Apples? 12 apples ( traded)

Brian Bread Brian Apples Are they better off?? 8 loaves (0 + 8 traded)
18 apples ( traded) Are they better off??

Are they better off?? No Specialization or Trade
Specialization and Trade Gains from trade Elizabeth Bread Elizabeth Apples Brian Bread Brian Apples

Specialization and Trade Gains from trade Elizabeth Bread 10 Elizabeth Apples Brian Bread 5 Brian Apples 15

Specialization and Trade Gains from trade Elizabeth Bread 10 12 Elizabeth Apples Brian Bread 5 8 Brian Apples 15 18

Specialization and Trade Gains from trade Elizabeth Bread 10 12 +2 Elizabeth Apples Brian Bread 5 8 +3 Brian Apples 15 18

Both are Better off!!

Can you do it?? United States United Kingdom Clothing Food 40 60 20 30
60 20 30 10 1. Draw the production possibility curves for both countries. (Clothing on y-axis) 2. Which country has the comparative advantage in clothing? Food? 3. The United States and United Kingdom are negotiating a trade of food and clothing between the countries. If the terms of trade is 25 units of clothing for 15 units of food, should both counties agree?

Economic System The way in which a society decides to answer key economic questions What goods will be produced? How will the goods be produced? For whom will the goods be produced? Where on the PPF will the economy operate? What is the nature of trade? What function do prices serve?

Two major economic systems
Capitalism An economic system based on private ownership of capital Market economy Socialism An economic system based on state ownership of capital Most use pieces of each  mixed capitalism

How do they differ PPF What good to produce?
Capitalist: Buying behavior of consumers signal for producers to produce more/less Socialist: Government sets up how much to produce What good to produce? Capitalist: Consumers and producers decide Socialist: Government decides

How goods will be produced?
Capitalist: producers decide Socialist: government decides For whom to produce? Capitalist: Consumers decide if they are able and willing to purchase the good Socialist: Government may redistribute funds to get certain people certain items Trade Capitalist view: Trade benefits both sides Socialist view: Trade benefits one side at the expense of the other

Prices Capitalism views Socialism views Rations goods and services
Conveys information Serves as an incentive to respond to information Socialism views Price is set by greedy businesses with much economic power Price controls (can’t charge more or less than a certain price)

Now we want to use these questions for the next chapter as we look at:
What a market is and how is it established.

Homework #3 Chapter 2 Questions 1, 5, 12, and 17
Working with Graphs and Numbers: 1, 2, and 5

Homework #3 Chapter 2 Question 1: Daniel Wonderly
Question 5: James Washington Question 12: Ashlea Ward Question 17: Katia Trujillo Working with Graphs and Numbers: Question 1: Johanna Trujillo Question 2: Ty Treece Question 5: Melissa Steele Alternates: Jermaine Spence and Arturo Soliz

Homework #3 Chapter 2 Question 1: Shelly Arner
Question 5: Albert Depalma Question 12: Yazan Hawatmeh Question 17: Jesus Herrera Working with Graphs and Numbers: Question 1: Kevin Jenkins Question 2: Kelsey Jones Question 5: Sophie Laureano Alternates: Marisa Navarro and Daniela Rosales

Chapter 3 Supply, Demand, and Price

Market Market is an arrangement by which people exchange goods and services including money Two sides Buyer Seller

Starting with the Buyer Side
Quantity demanded Amount of a good people are willing and able to buy at a particular price at a particular point in time

Important parts of definition
Willing Able Particular Price Particular point in time

Demand Quantity demanded over all prices during a specific point in time Important parts: Quantity demanded All prices Specific point in time

So…. So….

Who does what in the Market?
Consumers Buy goods Sell Labor Firms Sell goods Buy Labor

Circular Flow Depiction of how the market works in the economy
Includes both buyers and sellers Shows the flow of goods and services between consumers and firms

Law of Demand As price of a good (decreases) increases the Quantity demanded of that good (increases) decreases

Demand Schedule 40 1 30 2 20 3 10 4 Quantity Price
Numerical table of quantity demanded at different prices 40 1 30 2 20 3 10 4 Quantity Price

Demand Curve Graphical representation of the demand schedule
Used to represent the relationship between price and quantity Why type of relationship do you expect price and quantity to have?

Demand Schedule and Demand Curve

Market Demand Curves Previous demand curve was for an individual
Single buyer How can we get the market curve from individual demand curves? All buyers Sum the individual Demand curves…

Therefore….

Deriving a Market Demand Schedule & Curve

Determinates of Demand
Income Normal good Inferior good Preferences Prices of Related Goods Substitutes Compliments

Determinates Continued…
Number of Buyers Expectations of Future

ESSENTIALS OF MICROECONOMICS ECONOMICS 201

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