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EC201- Microeconomics
Aaron Jenkins
Business Management
Linn-Benton Community College
Winter 2018
If not here,
where would
you be?
What’s your
opportunity
cost?
Opportunity cost =
highest valued alternative that
you give up to do something
Why are you here?
A
potentially
better
future! As a
college
grad!
Which one is the top Economist
in the U.S.?
A B
Which one is the top Economist
in the U.S.?
A B
Ben Bernanke
Federal Reserve Chair
2006-2014
Janet Yellen
Federal Reserve Chair
2014 - present
Why study Economics?
• Understand better the world you live in,
and the forces that shape it
• Make you a savvier participant in the
economy
• More informed citizen/voter
– Potential & limits of economic policy
Did you know that ‘Economic
Sciences’ is a Nobel Prize
category!
Paul Krugman –
2008 Nobel Prize Winner
What is Economics?
• ECONOMICS:
– The science of how people, groups,
and societies deal with scarcity.
• GOAL (of economic actors):
– Achieve happiness in a world of full of
constraints.
Key Distinction
• Positive Analysis – What is
Vs.
• Normative Analysis – What ought to be
• Economics positive analysis where
costs and benefits of different policy
options or life decisions are measured
Basic Motivation• An economist assumes that a person’s
basic motivation is to be happy!
• Individuals act to make themselves as well off as possible (being “rational”)
• HOW? cost-benefit analyses of their decisions
– What trade-offs do I face?
– What is my best option given my constraints?
Types of Constraints
• Resources (e.g., money)
• Time
• Technology
• Opportunity Cost
My Background
• Lived in Oregon for ~6 years
• 7 different U.S. states
• 16 different countries
• B.A. Literary Studies & Spanish
• Investment Firm
• Masters in Applied Econ (UWisc-Madison)
• Environmental Policy Think Tank
• OR Dept of Fish & Wildlife
What about you?
• Name
• Where you’re from
• Major
• Survey – do at home
Review Syllabus
in Moodle
Remember to check your
LBCC email and/or
Announcements in Moodle
Ask Questions!
How to study the
textbook?!?!
• Chapter Outline & Learning Objectives
• Section Titles
• Terms defined in the margins
• Chapter Summary & Problems
21
Copyright © 2017 Pearson Education, Inc. All Rights Reserved
Economics6th edition
Chapter 1 Economics:
Foundations and
Models
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Chapter Outline
• 1.1 Three Key Economic Ideas
• 1.2 The Economic Problem That Every Society Must Solve
• 1.3 Economic Models
• 1.4 Microeconomics and Macroeconomics
• 1.5 A Preview of Important Economic Terms
• Appendix Using Graphs and Formulas
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What is this class about?
• People make choices as they try to attain their goals. Choices
are necessary because we live in a world of scarcity.
• Scarcity: A situation in which unlimited wants exceed the limited
resources available to fulfill those wants.
• Economics is the study of the choices people make to attain
their goals, given their scarce resources.
• Economists study these choices using economic models,
simplified versions of reality used to analyze real-world economic
applications.
24
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Some typical “economics” questions
We will learn how to answer questions like these:
– How are the prices of goods and services determined?
– Why do firms trade with one another?
– How does pollution affect the economy, and how should
government policy deal with these effects?
– Why does government control the prices of some goods and
services, and what are the effects of those controls?
25
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1.1 Three Key Economic Ideas
We interact with one another in markets.
Market: A group of buyers and sellers of a good or service and the
institution or arrangement by which they come together to trade.
In analyzing markets, we generally assume:
1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin
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Examples of Markets?
• Smartphones
• Automobiles
• Textbooks
• Water
• Rentals
• Stock
• Labor
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1. People are rational
Rational: Using all available information to achieve your goals.
Rational consumers and firms weigh the benefits and costs of
each action, and try to make the best decision possible.
Example: Apple doesn’t randomly choose the price of its iPhones;
it chooses the price(s) that it thinks will be most profitable.
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2. People respond to economic
incentives
As incentives change, so do the actions that people will take.
Example: When products go on sale--whether TVs or cars or
cereal--people tend to buy more of them.
Example: If I say that every student who attends the next class
will automatically get an A, attendance will probably be 100%.
…however, once students know that they’re guaranteed an A,
then attendance for the remaining classes will drop, perhaps to
0%.
29
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3. Optimal decisions are made at the
margin
While some decisions are all-or-nothing – e.g., do I open a
business or not? -- most decisions involve doing a little more or a
little less of something.
Example: Should you watch an additional hour of TV, or study
instead?
Economists think about decisions like this in terms of the marginal
cost and benefit (MC and MB): the additional cost or benefit
associated with a small amount extra of some action.
Comparing MC and MB is known as marginal analysis.
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Which sort of thinking goes on in the mind of a
hungry economist who has decided to satisfy his
hunger by eating potato chips?
a. The economist will buy the largest bag of potato chips he
can afford, and eat the whole thing, without wasting
anything.
b. The economist will stop after each additional chip is
consumed and examine the benefit and cost of that potato
chip before continuing on to the next one.
c. The economist would eat as many potato chips as are
available in a world of scarcity.
d. The economist will eat potato chips only after determining
that all alternative munchies are less preferred to potato
chips.
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1.2 The Economic Problem That Every
Society Must Solve
In a world of scarcity, we have limited economic resources to
satisfy our desires.
• Therefore we always face trade-offs.
Trade-off: The idea that, because of scarcity, producing more of
one good or service means producing less of another good or
service.
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1. What goods and services will be
produced?
Individuals, firms, and governments must decide on the goods and
services that should be produced.
An increase in the production of one good requires the reduction
in the production of some other good. This is a trade-off, resulting
from the reality that productive resources are finite.
The highest-valued alternative given up in order to engage in
some activity is known as the opportunity cost.
Example (Govt): the opportunity cost of increased funding for
space exploration might be decreased funding for cancer
research.
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2. How will the goods be produced?
A firm might have several different methods for producing its
goods and services.
Example #1: A music producer can make a song sound good by
• Hiring a great singer, and using standard production techniques;
• Hiring a mediocre singer, and using Auto-Tune to correct the
inaccuracies.
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2. How will the goods be produced?
A firm might have several different methods for producing its
goods and services.
Example #2: If the cost of workers increases, a firm might respond
by
• Changing its production technique to one that employs more
machines and fewer workers
• Moving its factory to a location with cheaper labor (e.g., China)
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3. Who will receive the goods and
services produced?
The way we are most familiar with in the United States is that
people with higher incomes obtain more goods and services.
Changes in tax and welfare policies change the distribution of
income; though people often disagree about the extent to which
this “redistribution” is desirable.
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Types of economies
Centrally planned economy: An economy in which the
government decides how economic resources will be allocated.
Market economy: An economy in which the decisions of
households and firms interacting in markets allocate economic
resources.
Mixed economy: An economy in which most economic decisions
result from the interaction of buyers and sellers in markets but in
which the government plays a significant role in the allocation of
resources.
• Example countries for each?
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Efficiency of economies
Market economies tend to be more efficient than centrally-planned
economies.
Market economies promote:
• Productive efficiency, where goods or services are produced
at the lowest possible cost; and
• Allocative efficiency, where production is in accordance with
consumer preferences;
– E.g., jeans & Soviet Union
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Source of economic efficiency
Productive efficiency comes about because of competition.
Allocative efficiency arises due to voluntary exchange…
Voluntary exchange: A situation that occurs in markets when
both the buyer and the seller of a product are made better off by
the transaction.
• Each transaction that takes place improves the well-being of the
buyer and seller; transactions continue until no further
improvement can take place.
• Examples?
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Caveats about market economies
Markets may not result in fully efficient outcomes. For example:
• People or firms might not immediately do things in the most
efficient way
– Ex: Blu-Ray players – high cost at first
• Market outcomes might ignore the well-being of people who are
not involved in transactions
– Ex: Pollution from coal plant
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Market economies and equity
Economically efficient outcomes are not necessarily the most
desirable.
• Less efficient outcomes may be more fair or equitable.
Equity: The fair distribution of economic benefits. Harder to
define than efficiency. Can mean different things to different folks.
An important trade-off for a government is that between efficiency
and equity.
Example: If we tax income, in theory people might work less or
open fewer businesses; however, those tax receipts can fund
programs that aid the poor.
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1.3 Economic Models
Models are simplifications of reality that include only
essential elements and exclude less relevant details.
• Assumptions and simplifications: every model needs them in
order to be useful.
• Testability: good models generate testable predictions, which
can be verified or disproven using data.
• Economic variables: something measurable that can have
different values
– E.g., the incomes of doctors, revenues of tech firms, sales of books
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Important features of economic models
Models are simplifications of reality that include only
essential elements and exclude less relevant details.
• Assumptions and simplifications: every model needs them in
order to be useful.
• Testability: good models generate testable predictions, which
can be verified or disproven using data.
• Economic variables: something measurable that can have
different values, such as the incomes of doctors or revenues of
tech companies.
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Positive and normative analysis
Economists try to mimic natural scientists by using the scientific
method. But economics is a social science; studying the behavior
of people is often tricky.
When analyzing human behavior, we can perform:
• Positive analysis: analysis concerned with what is
• Normative analysis: analysis concerned with what ought to be
Economists mostly perform positive analysis.
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Making the Connection: Should medical
school be free?
Forecasts indicate a significant shortage of doctors, especially
primary care physicians, by 2020. Why?
High costs of medical school may:
• Discourage some people from becoming doctors
• Lead people to pursue lucrative specialties instead of primary
care (student debt)
Would more people become primary care physicians if medical
school were free? And if so, would it be worth the cost?
• Economic models can find answers to the positive aspects of
this debate.
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1.4 Microeconomics & Macroeconomics
Microeconomics is the study of
• how households and firms make choices,
• how they interact in markets, and
• how the government attempts to influence their choices.
Macroeconomics is the study of the economy as a whole,
including topics such as inflation, unemployment, and economic
growth.
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Table 1.1 Issues in Microeconomics and Macroeconomics47
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1.5 A Preview of Important Economic
Terms (p.17-18)
Like all fields of study, economics uses terms or jargon with
specific, precise meanings.
Sometimes these terms will be familiar but used in a different way
in economics.
Examples:
• Technology: the processes a firm uses to produce goods and
services
• Firm = company = business
• Capital: physical, not financial capital. Manufactured goods that
are used to produce other goods and services.
– E.g., computers, factory buildings, machine tools
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Appendix: Using Graphs and Formulas
Use graphs and formulas to analyze economic situations
A map is a simplified
model of reality,
showing essential
details only.
Economic models, with
features like graphs and
formulas, can help us
understand economic
situations just like a map
helps us to understand
the geographic layout of
a city.
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Figure 1A.1 Bar Graphs and Pie Charts
Panel (a) shows a bar graph of market share data for the U.S.
automobile industry; market share is represented by the height of the bar.
Panel (b) shows a pie chart of the same data; market share is
represented by the size of the “slice of the pie”.
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Figure 1A.2 Time-Series Graphs
Both panels present time-series graphs of Ford Motor Company’s
worldwide sales during each year from 2001 to 2010.
• Panel (b) has a truncated scale on the vertical axis, and panel (a)
does not.
• As a result, the fluctuations in Ford’s sales appear smaller in panel (a)
than in panel (b).
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Formula for a percentage change
One important formula is the percentage change, which is the
change in some economic variable, usually from one period to the
next, expressed as a percentage.
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100 periodfirst in the Value
periodfirst in the Valueperiod second in the Valuechange Percentage
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Figure 1A.6 Graphing the Positive Relationship between
Income and Consumption
Positive relationship
between two economic
variables--as one variable
increases, the other
variable also increases.
In a negative relationship,
as one variable increases,
the other decreases.
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Scatterplot - Midterm Score X Quiz Score
n = 26
y = 0.0062x + 0.3014R² = 0.6831
0%
20%
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100%
0 20 40 60 80 100
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xam
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