Download Chpt 1 Intro to Micro

1
Big Questions
1. What is economics?
2. What are the fundamental concepts
underlying economic models?
Big Questions
 Economics is the study of how people allocate
their limited resources to satisfy nearly unlimited
wants.
 The fundamental concepts on which economic
models are based:
1. Incentives
2. Trade-offs
3. Opportunity cost
4. Marginal thinking
5. Trade creates value
Scarcity
The Key Economic Problem
 Scarcity means limited resources
 The limited nature of society’s resources
 Nothing is infinite in nature—not even air and
water! So can’t always get all that you want
 Economics
 The study of how people allocate their limited
resources to satisfy their nearly unlimited
wants
 The study of how people make decisions
What is Economics?
 Economics
 The social science that analyzes production,
distribution of goods and service
 Studies how individuals and firms make
decisions about:
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What to purchase (choosing how to allocate income
among various goods, services and savings)
How to allocate their time (leisure/work/school)
What goods to produce
What technologies to use
How goods get allocated in the marketplace
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5
Ten Principles of Economics
 Economists study:
 How people make decisions
 How people interact with one another
 Analyze forces and trends that affect the economy as a
whole
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is Economics?
 Alchian and Allen
 Discovery and analysis of the different ways in which
individual goals and activities can be coordinated
without central planning (i.e., by the invisible hand – or
marketplace)
 The unit of analysis is the individual
 Economic analysis is scientific, not normative
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Formulates hypothesis about behavior, subjects these
hypotheses to tests/analysis with data, accepts/rejects the
model based on the results
It helps explains what conditions lead to what consequences
What is Economics
 2 major fields of inquiry
 Microeconomics
 Study of individual markets and factors that affect market
price, quantity supplied
 two principal actors: consumers/households and
firms/producers
 Macroeconomics
 Study of a system of (national) markets focusing on national
income (gross national product), price levels (inflation),
employment/unemployment and international trade
 Focuses on the role of government (Congress and budgets,
Federal Reserve Bank), regulation (and regulatory agencies,
business cycles and their effect on the economy
Key Assumptions About Individual
Economic Behavior
Alchian and Allen
1. For each person, some goods are scarce -> choices
2. Each person desires many goods and goals -> tradeoffs
3. Each person is willing to give up some of one economic
good to get more of another economic good -> basis for
trade
4. The more one has of a good, the lower is its personal
marginal value -> diminishing marginal value
5. Not all people have identical tastes and preferences
6. People are innovative and rational
An Example of a Model Built
on These Assumptions
 A Model of Consumer Demand
Foundations underlying the Model
 The five underlying concepts of economic models:
Incentives – people respond to incentives
1.
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Lower the price -> buy more
Trade-offs – buying one good -> can’t buy others
2.
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Marginal value of consumption vs cost (price)
Opportunity cost – what is given up
3.
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Foregone alternative
Marginal thinking – value of last good = cost (price)
4.
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Diminishing marginal value
Trade creates value
5.
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Voluntarily purchase the goods as value is higher than cost