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Chapter 1-6

Microeconomics Chapters 1 - 6

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Department
Economics
Course
Economics 1021A/B
Professor
Ronald Wintrobe
Semester
Fall

Description
September 11th, 2012 Chapter 1 Definition of Economics Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Two Kinds of Economics ⁃ Microeconomics is the study of choices made by individuals and businesses, and the influence of government on those choices ⁃ Macroeconomics is the study of the effects on the national and global economy of the choices that individuals, businesses, and governments make Two big economic questions summarize the scope of economics: ⁃ How do choices end up determining what, how and for whom goods and services get produced? ⁃ When do choices made in the pursuit of self-interest also promote the social interest? What, How and For Whom? ⁃ Goods and services are the objects that people value and produce to satisfy wants. What? • What we produce changes over time. • Sixty years ago, almost 20 percent of Canadian jobs work on farms, now 3 percent The service sector includes: Accommodation and food services, administration and support, professional, scientific and technical services, real estate, rental and leasing, retail trade, transportation and warehousing, etc. How? • Goods and services are produced by using productive resources that economists call factors of production • The “gifts of nature” that we use to produce goods and services are land • Work time and effort that people devote to producing goods & services is labour • The quality of labour depends on human capital, which is the knowledge, skills.... • Tools, instruments, machines, buildings and other constructions that are used to produced goods and services are capital. • The human resource that organizes land, labour and capital is entrepreneurship. For Whom? Who gets the goods and services depends on the incomes that people earn. • Land earns rent • Labour earns wages • Capital earns interest • Entrepreneurship earns profit Self interest vs Social interest ⁃ You make choices that are in your self-interest – choices that you think are best for you ⁃ Choices that are best for society as a whole are said to be in the social interest. ⁃ Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest? Eight issues ⁃ Does public ownership do a better job than private business and free markets? (China...authoritarian capitalism) ⁃ Is globalization a benefit or a problem? ⁃ Do the technological advances in the “new economy” bring benefits to all? ⁃ How did 9/11 change our economic lives? ⁃ Do corporate scandals show that big business works against the social interest? ⁃ Should drug companies be forced to make HIV/AIDS drugs available to poor people at a low cost? ⁃ Are we destroying our tropical rain forests? (“Should trees have 'standing'” (book by Christopher D. Stone) ⁃ Are the world's water resources being managed properly? The Economic Way of Thinking Human Nature, Incentives, and Institutions Economics take human nature as given and view people as acting in their self- interest. Means they are rational Rational actions are not necessarily selfish actions. Private vs Social Interest If human nature is given and people pursue self-interest, how can the social interest be served? 1. Competition 2. The role of institutions in channelling competition so that people behave in the social interest Markets can be used in new ways to help fight poverty ex Muhammud Yunus won the Nobel Peace Prize with his program of loans for the poor “Microfinance” Economics: A Social Science Model building – an economic model is an abstract description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. These models yield positive implications which can be tested using statistical techniques ex Law of Demand: the price of a good rises, people buy less of it We can test that Law, which is an implication of the theory of demand, with facts Tutorial: (this next section before chapter 2 isn't covered in any ppt, but is in the textbook: page 8 and page 9) Sep 13. Chapter two sharpens the concepts of scarcity and opportunity cost Economic efficiency http://students.uwo.ca/psp/heprdweb/?cmd=login&languageCd=eng& Choices and Tradeoffs 权衡 – It assumes people are rational – that means, given their ends, they choose the best means of achieving them – you can think about every choice as a tradeoff – an exchange – giving up one thing to get something else Opportunity Cost – Thinking about a choice as a tradeoff emphasizes cost as an opportunity forgone – The highest- valued alternative that we give up to get something is the opportunity cost of the activity chosen Choosing at the Margin – People make choices at the margin, which means that they evaluate the consequences of making incremental changes in the use of their resources – The benefit from pursuing an incremental increase in an activity is its marginal benefit – the opportunity cost of pursuing an incremental increase in an activity is its marginal cost Responding to incentives – our choices respond to incentives – for any activity, if marginal benefit exceeds marginal cost, people have an incentive to do more of that activity – if marginal cost exceeds marginal benefit, people have an incentive to do less of that activity Chapter 2 Production Possibilities and Opportunity Cost – The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot – To illustrate the PPF, we focus on two goods at a time and hold the quantities of all other goods and services constant Production efficiency – We achieve production efficiency if we cannot produce more of one good without producing less of some other good – The points of the frontier are efficient Tradeoff Along the PPF – Every choice along the PPF involves a tradeoff Opportunity Cost – The PPF makes the concept of opportunity cost precise – If we move along the PPF from C to D, the opportunity cost of the increase in pizza is the decrease in CDs. Production efficiency – All the points along the PPF are efficient, in terms of production (efficiency in production) Using Resources Efficiently Preferences and Marginal Benefit – Preferences are a description of a person's likes and dislikes – The marginal benefit of a good or service is the benefit received from consuming one more unit of it – We measure marginal benefit by the amount that a person is willing to pay for ...... – It is a general principle that the more we have of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it. – We call this general principle the principle of decreasing marginal benefit. – The marginal benefit curve shoes the relationship between the marginal benefit of a good and the quantity of that good consumed. Efficient Use of Resources – When we cannot produce more of any one good without giving up some other good, we have achieved production efficiency, and we are producing at a point on the PPF. The more MC increases, the more MB decreases. Allocative efficiency (not in text) – Allocative efficiency is more complex than production efficiency – As an economist, you cannot say one distribution of income is better that another – Change the distribution of income, and this changes the point of allocation efficiency Sep 18: Economic Growth ⁃ The expansion of production possibilities – and increase in the standard of living – is called economic growth. ⁃ Two key factors in economic growth: Technological change, Capital accumulation ⁃ Technological change is the development of goods and of better ways of producing goods and services. ⁃ Capital accumulation is the growth of capital resources, which includes human capital The Costs of Economic Growth (not from textbook) – Sometimes growth comes at the expense of the environment (China). This cost should be counted as a cost of growth, even though environmental destruction doesn't enter GNP (it does enter HDI) – Growth sometimes increases inequality – There are other more subtle costs to growth (eg loss of ability to relax, destruction of relationships (Enron)) – “ Happiness research” shows that the rich are not as happy as you might think, relative to the poor – But poor countries usually need economic growth Gross National Happiness (Bhutan) – Gross National Happiness looks at the quality of life, how much leisure time you have, what's happening in your community, and how integrated you feel with your culture. – based on interviews with more than 8,000 Bhutanese Gains from Trade – Liz's Smoothie Bar – In an hour, Liz can produce 40 smoothies or 40 salads – Liz's opportunity cost of producing 1 smoothie is 1 salad – Joe's Smoothie Bar – In an hour, Joe can produce 6 smoothies or 30 salads – Joe's opportunity (marginal) cost of producing 1 smoothie is 5 salads – Joe's opportunity cost of producing 1 salad is 1/5 smoothie – Absolute advantage: When one person is more productive than another person in several or even all activities – Liz is four times as productive as Joe – Comparative Advantage: A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else – Liz has an absolute advantage – Joe has a comparative advantage in making salad – Dynamic Comparative Advantage – Learning-by-doing occurs when a person (or nation) specializes and by repeatedly producing a particular good or service becomes more productive in that activity and lowers its opportunity cost of producing that good over time – Dynamic comparative advantage occurs when a person (or nation) gains a comparative advantage from learning-by-doing. – Dynamic Comparative Advantage – Learning-by-doing occurs when a person (or nation) specializes and by repeatedly producing a particular good or service becomes more productive in that activity and lowers its opportunity cost of producing that good over time – Dynamic comparative advantage occurs when a person (or nation) gains a comparative advantage from learning-by-doing. To work, you need the right economic institutions to make market word, four complementary social institutions have evolved over the centuries: ⁃ Firms ⁃ Property rights ⁃ Markets ⁃ Money Economic Coordination Property rights= rights to won, use, or sell property Markets coordinate individual decisions through price adjustments Chapter 3 Sep 20: Demand and Supply Objectives After studying this chapter, you will be able to : ⁃ describe a competitive market and think about a price as an opportunity cost ⁃ explain the influences on demand ⁃ explain the influences on supply ⁃ explain how demand and supply determine prices and quantities bought and sold ⁃ use demand and supply to make predictions Markets and prices – A market is any arrangement that enables buyers and sellers to get information and do business with each other. – A competitive market is a market that has many buyers and many sellers, so no single buyer or seller can influence the price – The money price of a good is the amount of money needed to buy it – The relative price of a good = the ratio of its money price to the money price of some other good Demand If you demand something, then you 3. want it, 4. can afford it, and 5. have made a definite plan to buy it (maybe at the last minute) Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price. A demand curve shows the relationship between the quantity demanded of a good of its price when all other influences on consumers' planned purchases remain the same A rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a movement along the demand curve. Substitution effect – when the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded decreases Income effect – when the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded decreases. A demand curve is also a willingness-and-ability-to-pay curve. The smaller the quantity available, the higher the price that someone is willing to pay for another unit. Willingness to pay measures marginal benefit. A Change in Demand When any factor that influences buying plans other than the price of the good changes, there is a change in demand for that good The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve When demand increases, the demand curve shirts rightward Six main factors that change demand are 6. The prices of related goods, especially if they are closely related 7. Expected future prices 8. Income 9. Expected future income 10.Population 1
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