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Chapter 1

ECON 212 Chapter Notes - Chapter 1: Normative Economics, Shortage, Constrained Optimization

Course Code
ECON 212
Arthur E Stewart

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Chapter 1: Analysing Economic Problems
Why Study Microeconomics?
Economics is the science that deals with the allocation of limited resources to satisfy
unlimited human wants need to use resources which are scarce
o This is why econ is often described as the study of constrained choice
Microeconomics focuses on the behaviour of individual economic decision makers
o Consumers, businesses, workers, households, industries, labour markets, etc.
The Three Economic Questions
o What goods and services will be produced and in what quantities?
o Who will produce these goods and services and how?
o Who will receive these goods and services?
Three Key Analytical Tools
Economists construct and analyse economic models
o An exogenous variable is one whose value is taken as given in a model (outside)
o An endogenous variable is one whose value is determined with the model
Given exogenous variables, the model will describe the relationship w. the endogenous
The tools are: Constrained Optimization, Equilibrium Analysis, and Comparative Statics
Constrained Optimization
Used when we seek to make the best choice, taking into account limitations/restrictions
An objective function is the relationship that a decision maker seeks to max or min
The constraints represent limits/restrictions imposed on the decision maker
Marginal Reasoning and Constrained Optimization
Constrained optimization can reveal “obvious” answers may not always be correct
The solution to any Con.Op problem depends on the marginal impact of the decision
variables on the value of the objective function
o i.e. How many more sales you get for every additional $1 increase in advertising
The term marginal in microeconomics tells us how a dependent variable changes as a
result of adding on unit of an independent variable
Equilibrium Analysis
An equilibrium is a state or condition that will continue indefinitely as long as factores
exogenous to the system remain unchanged
Brief analysis of supply and demand in illustrating the concept of equilibrium
o As the price rises, consumers will demand less, suppliers will provide more
o This means demand is downward sloping and supply is upward sloping
o The equilibrium P & Q happens where the two intersect
o Any price below will create excess demand and DWL and any price above will
create excess supply and DWL
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