ESSENTIALS OF MICROECONOMICSECONOMICS 201
How can you find…or avoid me??
Where am I? BDC 230
How to contact me… 664-2026 or [email protected] www.csub.edu/~jvangilder
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 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?
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?
Textbook
Microeconomics 7th editionRoger Arnold
Attendance Policy
Two phrases to live by:I. If you don’t want to be here…we
don’t want you hereII. 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 Monday February 6th
Quiz 1 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 DishonestyClassroom Conduct
Disabilities
Chapter 1
What is Economics About
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
Normative 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 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 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 Includes only the “important” aspects
Why is a model necessary??
Parts of a Theory
Variables 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 Building and Testing a Theory
a
Evidence rejects the theory, soeither formulate a new theory,
or amend the old theory in termsof its variables, assumptions,
and hypotheses.
Identify thevariables that
you believe areimportant to
what you wantto explain or
predict.
Decide on whatit is you want to
explain orpredict.
State theassumptions of
the theory.
State thehypothesis.
Test the theoryby comparing
its predictionsagainst real-world events.
Return
Either
Or
Evidence supports thetheory. No further action isnecessary, although it is agood idea to continue to
examine the theory closely.
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 an Inverse Relationship
a
20
18
16
14
12
0
Price of CDs ($)
Quantity Demanded of CDs100 120 140 160 180
The variables priceand quantitydemanded areinversely related.
Demand for CDs
A
B
C
D
E
Two-Variable Diagram Representing a Direct Relationship Two-Variable Diagram Representing a Direct Relationship
a
360
300
240
180
120
60
0
Consumption ($)
Income ($)
100 200 300 400 500
The variablesincome andconsumption aredirectly related.
A
B
C
D
E
F
Two Diagrams Representing Independence between Two Variables Two Diagrams Representing Independence between Two Variables
a
(b)(a)
40
30
20
10
010 20 30 40
A B C D
Y
X
Variables X and Y areindependent (neither variable
is related to the other).
40
30
20
10
010 20 30 40
A
B
C
D
Y
X
Variables X and Yare independent.
Slope
Used to see how a variable changes in response to another variable changing
horizontal
vertical
X
YSlope
To calculate slope
Find two points on any straight line
21
21
12
12
XX
YYor
XX
YY
What sign do you expect the slope to have?
Direct relationship Positive
Inverse relationship Negative
No Relationship 0 or infinity
Calculating Slopes Calculating Slopes
a
YX
= +10+5
= +2Slope =Slope=Y
= = –1–10
10
40
30
20
10
010 20 30 40
(a)
A
B
C
D
X
Y
Y
X
40
30
20
10
010 20
(b)
A
B
C
D
X
Y
15
(negative slope)X
(positive
Calculating SlopesCalculating Slopes
a
010
+100
Slope =Y
= = `X(infinite slope)
A
B
C
D
Slope =Y
= = 0X(zero slope)
(d)(c)
40
30
20
10
010 20 30 40
A B C D
Y
X
40
30
20
10
010 20 30 40
Y
X
The 45 Line The 45 Line
a
20
20
Y
X
A
45
Line45
0
Homework
Chapter 1Questions 4, 5, 7, 8
Chapter 1 AppendixQuestions 6, 7, 9
In-class exercise 1
Do we understand Chapter 1?
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