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Chapter 1

Chapter 1

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Queen's University
ECON 212
Arthur E Stewart

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 ind
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