Introduction to Microeconomics - ECO 1104 - Part 1

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19 Apr 2012
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September 13 2011 - Lecture 2
Chapter One: Ten Principles of Economics
Definitions
Scarcity - The limited nature of society’s resources
Economics - The study of how society manages and allocates its scarce resources
(how a society makes tradeoffs), including:
How people decide how much to work, save, spend and what to buy
How firms decide on how much to produce and how many workers to hire
How a government decides how to divide its tax revenue between national defense,
social assistance, protecting the environment and more
Principle One: People Face Tradeoffs
Making decisions requires trading off one goal against another
Examples: leisure time vs. work, efficiency vs. equity
Efficiency - Society gets the most from its scarce resources (“enlarging the pie”)
Equity - The benefits of those resources are distributed fairly among the members of
society (“sharing the pie”)
This is one of the most difficult tradeoffs in public policy
Example: increasing welfare payments vs. reducing taxes
Principle Two: The Cost of Something Is What You Give Up to Get It
Decisions require comparing costs and benefits of alternatives
The opportunity cost of an item is what you give up to obtain that item
Example: skiing vs. going to work; cost of skiing = ski ticket, transportation and wage
loss
Principle Three: Rational People Think at the Margin
People make decisions by comparing benefits and costs at the margin (marginal benefits
and marginal costs) - textbook pg. 8
Marginal changes - small incremental adjustments to a plan of action
ECO1104: Introduction to Microeconomics
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Principle Four: People Respond to Incentives
People make decisions by comparing costs and benefits - behavior may change when
the costs or benefits change
Example: textbook pg. 19, #8
Increases incentive to work
Takes money away from those who cannot work and are the poorest
Principle Five: Trade Can Make Everyone Better Off
Trade allows people to specialize in what they do best
Everyone is better off with trade
Example: textbook pg. 19 #9
Example: buying a shirt; both the customer and salesperson are happy
Specialization
Principle Six: Markets Are Usually a Good Way to Organize
Economic Activity (Chapter 7)
A market is a group of buyers and sellers
“Organizing Economic Activity” means determining:
What goods to produce
How to produce them
How much of each to produce
Who gets them
Adam Smith (in his 1776 book, An Inquiry into the Nature and Causes of the Wealth of
Nations):
“Households and firms interacting in markets as if they are guided by an ‘invisible
hand’ that leads them to desirable market outcomes”
Prices are the instrument with which the invisible hand directs economic activity
In any market, buyers look at the price when determining how much to demand
Sellers look at the price when deciding how much to supply in order to increase revenue
As a result of the decisions that buyers an sellers make, market prices reflect both the
value of a good to society and the cost to society of making the good
Free market maximizes society’s happiness in this instance
Principle Seven: The Government Can Sometime Improve Market
Outcomes
Market failure occurs when the market fails to allocate resources efficiently
Reasons for market failures:
Externalities: the impact of one person’s action on a bystander (e.g. pollution)
Market power: ability of one person to unduly influence on market prices (e.g. LCBO
and The Beer Store)
ECO1104: Introduction to Microeconomics
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When the market fails, the government can intervene to promote efficiency and equity
Principle Eight: A Country’s Standard of Living Depends on its Ability
to Produce Goods and Services
Most important determinant of living standards:
Productivity, the amount of goods and services produced per unit of labour
Productivity depends on equipment, skills, and technology available to workers
Important implications for public policy
Principle Nine: Prices Rise When the Government Prints Too Much
Money
Inflation is an increase in the overall level of prices in the economy
One cause of the inflation is the growth in the quantity of money
Ideally, the Central Bank should increase the quantity of money at the same rate as
national production of goods and services increases
If the Central bank prints too much money
Too much money chase too few goods
Prices go up
Principle Ten: Society Faces a Short-Run Tradeoff Between Inflation
and Unemployment
The Phillips Curve = tradeoff between inflation and unemployment. When inflation goes
down, unemployment goes up
Short-run tradeoff
Controversial issue among economists
September 15 2011 - Lecture 3
Chapter Two: Thinking Like an Economist
Graphing Curves in the Coordinate System
Graphing Curves in the Coordinate System (cont)
Important observations:
When a variable that is not named on either axis changes ---> curve shifts
When two variables move in the same direction ! variables are positively related or,
equivalently, the curve is upward sloping
Conversely, when two variables move in opposite
directions (such as Emma’s demand curve) ---> variables are negatively related or,
equivalently, the curve is downward sloping
Slope of a curve: a measure of how much one variable responds to changes in another
variable
Slope = change in y/change in x = "y/"x = y2 - y1/x2 - x1
ECO1104: Introduction to Microeconomics
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