Download Chapter 2 The Economizing Problem

Econ 110 Principles of
Microeconomics
Welcome!
• “Economics is common sense
made difficult”
– As seen by an undergraduate student
Dr. Anwar Al-Shriaan
Economics Department
Office hours:
Sundays and Tuesdays 12:00– 12:50 pm and
by appt.
Today
• Syllabus
• Intro to economics
What will we be studying?
Eco 110 is the first economic theory course
• basic foundation of economics
• tools of discipline
Look at
•
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buyer and seller behaviour (markets)
role of government in markets
consumer choice
producer behaviour
determinants of income and poverty
Why have energy prices risen
(fallen)?
Why does price control not work?
Is Microsoft a monopoly?
Why do we care?
Is college worth the cost?
What causes the gender wage gap?
Why do airlines require a Saturday
night stay for a low fare?
Course Materials
Required:
McConnell and Brue“ Economics“, 16th ed
Recommended
course web site
• URL at top of the syllabus
• contains
– course information
– exam study guides
– TA’s
lecture notes
• PowerPoint slides
Email list
• I send email about
– Announcements
– Course information
• Do you prefer Emails or Facebook groups .
TA
• Check my website
• But please see me too!
Grading Policy
Midterm 1 30%
Midterm 2 30%
Recitation and Participations 10%
Final 30%
Grading Policy
Letter grades will be assigned as
follows:
94.00 – 100.0 % … A
90.00 – 93.99 % … A86.00 – 89.99 % … B+
83.00 – 85.99 % … B
80.00 – 82.99 % … B78.00 – 79.99 % … C+
73.00 – 77.99 % … C
70.00 – 72.99 % … C66.00 – 69.99 % … D+
60.00 – 65.99 % … D
59.99 – 0.00 % … F
Grading Policy
Your Final Grades: 1st Mid + 2nd Mid + Part
+ Final.
If Your Participation > 8.5 you will have
Extra credits as follows:
Your Final Grades: 20% X Max (1st Mid, 2nd
Mid, Final)
Grading Policy
Your Final Grades: 1st Mid + 2nd Mid + TA + Part + Final.
If Your Participation > 8.5 you will have Extra credits as follows:
Your Final Grades: 20% X Max (1st Mid, 2nd Mid, Final)
1st Mid
(25)
2nd Mid
(25)
Part
(10)
Final
(40)
Total
22
24
9
28
82
%84
%88
%70
B-
86
B+
1st Mid
(25)
2nd Mid
(25)
Part
(10)
Final
(40)
Total
15
17
9
36
77
%60
%68
%90
C
82.4
B-
1st Mid
(25)
2nd Mid
(25)
Part
(10)
Final
(40)
Total
15
17
6
40
76
%100
76
40
80
B-
86
B+
%68
15
17
9
C
final exam
• cumulative
Makeup's
•
•
•
•
•
•
Usually I don’t do it
planned absence: 1 week’s notice
emergencies: case-by-case
must be an excused absence!
must be documented!
makeup's may be essay exams or I may re weight
other exams
Attendance
• regular attendance is expected
• you are responsible for information in class
• attendance is necessary to earn extra credit.
Please be respectful of your
classmates
• be on time
• do not talk during lecture
• do not have your phone on
Cheating
• you cheat,
• I catch you,
• you fail the course
• programmable calculators (e.g. TI83),translators, phones, PDAs, etc.
are NOT allowed in exams
Course Schedule
• in syllabus
• note exam dates,
• note the final exam date & time
Tips for success
•
•
•
•
•
•
•
•
come to class with lecture notes to follow
read the book!!
weekly “look-through”
ask for help
ME or
the TA or
ME
use available resources
– course web site
Why you should try to learn something
in this course.
Percentage of wage dispersion explained by skill factors.
Huge variation in
earnings of low vs.
high-skilled
college graduates
• if you need special accommodations, see me
• if you are having problems in the course, see me
sooner NOT later
Some definitions of economics
•
“Economics is a study
of mankind in the
ordinary business of life”
•Alfred Marshall
• "the purpose of studying
economics is not to acquire a
set of ready-made answers to
economic questions, but to
learn how to avoid being
deceived by economists."
• Joan Robinson
•
“Economics is what economists
do”
•
Jacob Viner
Economics
(1)
• Study of the choices people make to attain
their goals given their scarce resources.
Economics: Foundations and Models
1. What do economists study?
•
gasoline prices, inflation, housing markets,
international trade, income inequality, sports, families,
smoking, health care, happiness
•
decision-making or choices
2. How do they do it?
•
by using theories and models
•
theories are based on assumptions
What makes a good theory or a
model?
• Models are not judged by their
realism but by their usefulness
• What is the most useless map in
the world?
To be useful a model has to be refutable
Why study theory?
•
“I don’t know how it is in theory but
here is what I know from my 20 years
of experience will happen “
• Laura, Executive MBA student
• Theory saves time!
Learning Objective 1.3
Making •When Economists Disagree:
the
A Debate over Outsourcing
Connection
Does outsourcing by U.S.
firms raise or lower incomes in
the United States?
Economics (2)
• Study of the choices people make to attain
their goals given their scarce resources.
Economics
Scarcity
When the price is zero
there is not enough for
everyone
Unlimite
d wants
Choices
People behave as if
they are comparing
the costs and
benefits
Benefits
Limited
availabilit
y
Costs
Economics
Scarcity
Everything has alternative
uses
Tradeoffs
Opportunity cost
Economics
Choices
People are rational when they
behave as if they were comparing
costs and benefits
People respond to incentives
Decisions are made on the margin
as if
• “…getting out of bed in the
morning and making breakfast
involves more complex decisions
than the average game of chess.
(Will that fries egg kill me in
twenty-eight years?)”
• Charles Wheelan
Economics (3)
• Study of the choices people make to attain
their goals given their scarce resources.
The Economic Problem That Every
Society Must Solve
Trade-offs force society to make choices, particularly when
answering the following three fundamental questions:
1 What goods and services will be produced?
2 How will the goods and services be produced?
3 Who will receive the goods and services produced?
The Economic Problem That Every
Society Must Solve
• Centrally Planned Economies versus Market
Economies
Centrally planned economy An
economy in which the government
decides how economic resources will be
allocated.
Market economy An economy in which
the decisions of households and firms
interacting in markets allocate
economic resources.
The Economic Problem That Every
Society Must Solve
• The Modern “Mixed” Economy
Mixed economy An economy in which
most economic decisions result from
the interaction of buyers and sellers in
markets but in which the government
plays a significant role in the allocation
of resources.
Economic Models
• Normative and Positive Analysis
Positive analysis Analysis
concerned with what is.
Normative analysis Analysis
concerned with what ought to
be.
Don’t Let This Happen to YOU!
Don’t Confuse Positive Analysis with Normative Analysis
2
C HAPTE R
The Market
System and
the Circular
Flow
SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
1. LAND
2. CAPITAL
HUMAN RESOURCES
3. LABOR
4. ENTREPRENEURIAL ABILITY
Resource payments: correspond to resource
categories
PROPERTY RESOURCES
RENTAL
LAND
INCOME
INTEREST
CAPITAL
INCOME
HUMAN RESOURCES
LABOR
ENTREPRENEUR
WAGES
PROFIT &
LOSS
Macroeconomics Starts Here
Economic Systems
• Definition: A particular set of institutional
arrangements and a coordinating mechanism to
respond to the economizing problem.
• Economic systems differ as to:
1) who owns the factors of production
2) the method used to motivate, coordinate, and
direct economic activity.
The Command System
• The government owns most property resources
and economic decision making occur through a
central economic plan.
• The central planning board determines
production goals for each firm and resources to
be allocated.
The Market System
• There is private ownership of resources.
• Markets and prices coordinate and direct
economic activity.
• Each participant acts in its own self-interest.
• In pure capitalism the government plays a very
limited role.
Characteristics of the Market System
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Private Property.
Freedom of firms to choose.
Self interest.
Competition.
Markets and prices.
Technology and capital goods.
Specialization.
Use of money.
Active, but limited government.
The Circular Flow Model
• There are two groups of decision makers in
the private economy: households (resource
owners) and businesses (resource users)
• The market system (resource markets and
product markets) coordinates these decisions.
What happens in the resource markets?
a. Households sell resources directly or indirectly
(through ownership of corporations) to businesses.
b. Businesses buy resources in order to produce
goods and services.
c. Interaction of these sellers and buyers
determines the price of each resource, which in
turn provides income for the owner of that
resource.
d. Flow of payments from businesses for the
resources constitutes business costs and resource
owners’ incomes.
What happens in the product markets?
a. Households are on the buying side of these
markets, purchasing goods and services.
b. Businesses are on the selling side of these markets,
offering products for sale.
c. Interaction of these buyers and sellers determines
the price of each product.
d. Flow of consumer expenditures constitutes sales
receipts for businesses.
CIRCULAR FLOW MODEL
RESOURCE
MARKET
BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET
CIRCULAR FLOW MODEL
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET
CIRCULAR FLOW MODEL
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
CIRCULAR FLOW MODEL
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
CIRCULAR FLOW MODEL
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
CIRCULAR FLOW MODEL
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
More Realistic Circular Flow
Macroeconomic Policies
Limitations of the model:
1. Does not depict transactions between
households and between businesses (interbusinesses).
2. Ignores government and the “rest of the
world” in the decision-making process (we
will take care of them later on).
3. Does not explain how prices of products and
resources are actually determined.