1. ECON 103 Microeconomics Dr. Malcolm Rutherford Office: BEC 340
Office hours: Tuesday 10:30-11:30 and Wednesday 11:30-12:30, or by appointment.
Office phone:

2. Econ 103 Microeconomics Text Web sites Labs Help Centre
Study guide exercises
Outline
Exams
Grading
Other policies, rules, and regulations

3. Part 1 Basic Concepts and Models
Interest in economic problems
But specific problems and issues change over time
General analytic framework—how to think about any economic problem
Abstraction and model building
Simplified models that capture key general characteristics
Empirical testing of models
Economics and policy
Positive and normative

4. Economics Economics is about “the economy”
The way in which individuals and social groups “make a living”
Provides the material well being of individuals and society
Economics can also be defined in terms of technique—choice in the face of scarcity
Techniques of economic analysis sometimes applied to non-economic subject matter

5. The Market Economy
Production and distribution result largely from individuals pursuing their own self interest, in the institutional context of markets
Specialization and exchange
Decentralized
Complex and interdependent
How does this complex and decentralized system work, rather than becoming chaotic?
Markets provide information and incentives (prices, profits) and coordinate economic decisions

6. The Market Economy Markets allocate resources BUT:
Markets and the distribution of income
Markets and market power
Markets in everything?
Constraints on market activity
Misbehaving markets?
Market failures
Government and markets

7. Basic Concepts: Scarcity
Limited resources—land, labour, capital, and entrepreneurship
Unlimited wants
Scarcity of resources relative to wants
Need for choice between alternative uses of resources
This leads to the next important concept: cost

8. Basic Concepts: Opportunity Costs
Cost derives from scarcity and the need to make choices
The cost of doing one thing is what is foregone
Explicit costs and implicit costs
The economists’ and the accountants’ definition of cost
The implicit cost of capital and economic profit

9. Basic Concepts: Decisions at the Margin
Some decisions involve all or nothing choices
Many decisions involve decisions at the margin
How much of something should I consume or produce?
Marginal cost and marginal benefit
Optimal point where MC=MB

10. Decisions at the Margin
Optimal rounds of golf per week for Dr. R. $ MC MB Q Q*

11. Basic Concepts: Efficiency
Productive efficiency—production at least cost
Allocative efficiency is where resources are allocated to their highest valued use
Marginal benefit=Marginal cost
At the margin people value this good (in terms of willingness to forego other things) just what it costs to produce (in terms of opportunity costs)
All costs and benefits must be included

12. Efficient Use of Resources
What must be foregone for an additional unit
What people will forego for an additional unit $ MC
Benefit exceeds cost
Cost exceeds benefits MB Q*
Q of good X

13. Basic Concepts: Incentives
People tend to respond to economic incentives
Price changes
Opportunities to increase income or reduce debts
Changes in incentives vs moral suasion
Incentives in the longer term
Unintended consequences and incentives

14. Some Basic Models: Production Possibilities
Production possibility curve gives a simplified representation of an economy
Two goods
Given resources and technology
Can use this model to think about opportunity cost and concepts of efficiency

15. Production Possibility Frontier
With given resources and technology
Unattainable
Quantity of
Military
goods
PPF
Attainable
Quantity of Civilian goods

16. Opportunity Cost Productive efficiency—on the PPF
Tradeoffs along the frontier
Opportunity cost
Constant opportunity cost
Increasing opportunity cost
Allocative efficiency—where on the PPF?

17. Economic Growth
Economic growth can be represented as an outward shift in the PPF due to accumulation of capital or technological change Y X

18. Some Basic Models: Gains from Trade
Without trade a person or nation is limited to their own domestic production possibilities curve
Gains from trade
Absolute advantage—based on different costs
Comparative advantage—based on different relative costs
An example of two individuals with different abilities or endowments and two activities—hunting for meat or collecting plants and berries—each with constant marginal opportunity costs

19. Gains from Trade Absolute Advantage Meat (kgs) Person 1
1 kg meat costs 2 kgs plants
1 kg plants costs .5 kg meat 10
Plants (kgs)
Meat (kgs) 20 20
Person 2
1 kg meat costs .5 kg plants
1 kg plants costs 2 kgs meat 10
Plants (kgs)

20. Gains from Trade Meat (kgs) Person 2’s ppf 20 b’ Trade line c 10
Plants (Kgs)
The trade line drawn here assumes terms
of trade of 1:1 and equal division of the
gains from trade

21. Gains from Trade Comparative Advantage Meat Person 1 30 1M=1.33P
Plants 40
Meat
Person 2 20
1M=0.5P
Plants 10

22. Gains From Trade Comparative Advantage Assume trade at 1P=1M M 30
Person 1
produces 40P and
trades 10 10 P 40 30 M
Person 2 produces
20 M and trades 10 20 10 P 10

23. Some Basic Models: Circular Flow
Circular Flow Diagram
expenditures
incomes
Households
factors
goods
Factor markets
Goods markets
inputs
outputs
Firms
Factor payments
sales revenues

24. The Market Economy
Individual and households choose what factors to supply for income and what goods to spend that income on
Firms choose what goods to produce and what factors to buy in order to produce them
Interdependence
Choice and constraints on choice
Incentives
Markets and efficiency
Market failures