Transcript definition - University of Alberta

Econ 101
Introduction to Microeconomics
•Why study Economics?
•What’s it all about?
Lorne Priemaza, M.A.
[email protected]
What’s it all about?
• Not: business or finance
• Not: the stock market
• Economics examines issues from a
social perspective : Social Science
– Analysis of human behavior
– Close relative of psychology and sociology
• Economics = Social Studies + Math
DEFINITION
• 1. ECONOMICS
– The study of how individuals & societies
allocate limited resources to satisfy
unlimited wants
– The study of how choices are made &
coordinated
What’s it all about? SCOPE
• MICROECONOMICS
– scarcity
– supply & demand
• markets
• consumer
• producer
• changes/impacts
– efficiency
– technology
– resources
• MACROECONOMICS
– business cycles
– unemployment/
employment
– inflation
– trade,
international
markets (global
economy)
SCOPE
• MICROECONOMICS
– The study of the
decisions and
interactions of
individual people &
businesses, & the
effects of government
regulation & taxes on
prices & quantities of
goods & services.
• MACROECONOMICS
– The study of the
national economy &
the global economy,
the way that overall
economic
variables fluctuate
& grow, & the effects
of government
actions on them.
DEFINITION
• 1. ECONOMICS
– The study of the problems that arise
from scarcity, & of the institutions that
resolve the inescapable conflicts over
the uses of scarce resources.
DEFINITION
• 2. ECONOMIC RESOURCES:
–people or things that possess the
ability to help produce commodities
(goods & services) that people
value.
DEFINITION
• 2. ECONOMIC RESOURCES:
–i) LAND (natural resources)
: sites
: productive items on
or under the earth’s surface
DEFINITION
• 2. ECONOMIC RESOURCES:
–ii) LABOUR
:productive people
& their efforts to
produce goods &
services
DEFINITION
• 2. ECONOMIC RESOURCES:
– iii) PHYSICAL CAPITAL
– all human made items used to
produce goods & services.
(produced means of production)
- ie: Computers and Factories
– not: Money
DEFINITION
• 2. ECONOMIC RESOURCES:
– iv) HUMAN CAPITAL
– characterization of the education and
training of workers
(productivity of workers)
- ie: years of university or years of job
experience or innate ability
DEFINITION
• 2. ECONOMIC RESOURCES:
– v) Other: ENTREPRENEURIAL ABILITY
:the innovator,
the risk bearer,
the initiator
RETURNS TO RESOURCES
• Rent, Wages, Interest, Profit:
– Rent is income earned by land
– Wages are income earned by labour
– Interest is income earned by capital
– Profit is income earned by entrepreneurs
DEFINITION
• 3. Scarcity
•Peoples’ wants are greater than
the economy’s ability to produce
desirable goods & services
‘scarcity’
scarce (limited) resources
unlimited wants (always want more)
Scarce Resources +
Unlimited Wants = Choice
Scarcity ≠ Poverty
• A homeless man who wants to eat
but cannot faces scarcity
• A university student who wants to
own a Mustang convertible but
cannot faces scarcity
• A millionaire who wants to be Prime
Minister but cannot faces scarcity
(only one spot available)
Scarcity  CHOICES
1.)What do we do with our
scarce resources?
2.)How do we make the best
use of our resources?
(Efficiency)
3.)For Whom will things be
produced? (Who will get what is
available?)
(Equity)
Rationing
“Scarcity” necessitates a
“rationing device” - which guides
choices.
Prices are the “rationing
device” in our Economy
Prices direct scarce
resources to their most
valued uses.
Rationing
Sometimes market forces alone do the
rationing, sometimes other forces are
operating as well;
E.g.
legal
moral
social
1.Terminology (definitions)
2.Economic Thinking/Reasoning
3.Economic Principles/Theory
4.Economic Policy Options
5.Economic Institutions
Basics: 1.) Terminology
• The language of Economics.
• The world through “economics” glasses
• You need to learn French to participate in a
French literature class
• You need to learn chemical notation to
succeed in Chemistry
• You need economic language to understand
Economics
Basics 2.) Economic Reasoning
• Choices made under conditions of
scarcity involve tradeoffs:
– advantages and disadvantages: costs and
benefits: incentives and disincentives.
• Economic reasoning is making
decisions by comparing costs and
benefits.
The Rationality Assumption
An individual makes decisions based on
maximizing his or her own self-interest.
Therefore
People do not intentionally make
decisions that would leave them
worse off
Non-Satiation Assumption
More goods are always preferable to
fewer goods; people are never satiated
People will always pick a job with the
highest wage
People will always eat 10 pieces of
pizza instead of 1
Costs and Benefits
• The relevant costs and benefits to
economic reasoning are the expected
incremental or additional costs incurred
and the expected incremental or
additional benefits of a decision
– That is only the costs and benefits that will
be affected by the decision are considered
– ADDITTIONAL costs or ADDITIONAL
benefits
Marginal Cost, Marginal
Benefit
• M.C.(marginal cost) is the extra cost
associated with the additional activity….
• M.B.(marginal benefit) is the extra
benefit associated with the additional
activity….
• $’s are used to measure these in order
to facilitate comparisons
No Sunk Costs
• Sunk Costs
– Have already been incurred and will not
change as a result of the decision you are
about to make.
– Represent past decisions.
– Are therefore not counted in a cost
benefit decision
– Ie: Cost of factory, rental costs, training
costs, membership costs
ECONOMIC DECISION MAKING
RULE:
(COST/BENEFIT)
•If the benefits of an action exceed the costs
DO IT
•If the costs of an action exceed the benefits
DON’T DO IT
•In the case of more than one alternative
CHOOSE THE ACTION WITH THE GREATEST
NET ADVANTAGE
Opportunity Cost
• The basis of economic cost benefit
analysis
• When a choice is made in favour of one
alternative, another alternative is given
up
• The next best alternative that is given
up when a choice is made is called the
opportunity cost of the choice.
THE OPPORTUNITY
COST of an action is
the next best
foregone
alternative.
Cost Benefit Exercise:
Example of economic decision
making in action:
Should I Go To University?
• Consider the “marginal” costs: and the
“marginal” benefits of this decision.
• Consider the Opportunity Cost
Opportunity Cost Example
Cost of 1 year of University:
Tuition:
$5000
Books:
$500
Opportunity Cost of 1 year University:
40 hr/week, 50 weeks/year,
$20/hour
$40,000
Total University Cost:
$45,500
Basics: 3.)Theory
• Simplified statement/ generalization about some part
of the economy, based on assumptions
– Assumptions define the circumstances under which
a theory is likely to apply
• ceteris paribus assumption -everything else
held constant
• Abstraction from reality
• Helps us to understand/explains some part of the
economy
Theory Assumptions
•Assumptions
Why
make Assumptions?
 Set the Stage
 Simplify
In
order you understand a theory, you
must understand the assumptions
underlying the theory.
Theory
• Method
– observe patterns in raw data
• generalize about the observed pattern
• Model:
– name for more specific statement of a
theory
Testing Theories
• It is wrong to judge the validity of a theory on the
basis of
• the “unrealistic” assumptions.
• how closely it represents reality.
• A model is “good” if it yields usable predictions and
explanations of the real world
– when a model is no longer supported by factual evidence,
it is “no good”
– we need a new theory
Basics: 4) Policy
• In order to carry out effective policy, the
policy maker must understand how the
economy works
• The is called POSITIVE ECONOMICS;
The economics of facts & theory
-ie: Minimum wage increase causes
unemployment increase
Basics: 4) Policy
• In order to conduct policy, the policy maker
must have some goals in mind
• NORMATIVE ECONOMICS is the
study of what the goals of the economy
should be
-ie: We should lower the minimum wage in
order to lower unemployment
Basics: 4) Policy
• Formulated to achieve the normative
GOALS for the economy
– Efficiency: use all our resources, (full
employment), use them in the best way possible.
– Equity in the distribution of income
– Economic Growth
– Stability: stable prices, stable growth
– Full Employment: Everyone looking for a job finds
one fairly quickly
Basics 5.) Economic Institutions
• Economic Institutions emerge from a
complicated combination of historical
circumstance & economic, cultural, social &
political pressures.
• Corporations, governments and cultural
norms are all economic institutions. They
differ significantly among nations
• Institutions give models context