Topic 1 Introduction microeconomics

Topic 1

Introduction to Microeconomics

1

BB107

byOoi Soon Beng

Textbook

2

McConnell, C.R., and Brue, S.L. (2011).

Economics: Principles, Problems and Policies,

19th Edition, New York: Irwin McGraw-Hill.

LO1

Learning Outcomes

• Define economics and the features of the

economic perspective.

• Distinguish microeconomics from

macroeconomics.

• Distinguish positive economics from normative

economics.

• List the categories of scarce resources and

nature of the economizing problem.

• Apply production possibilities analysis, increasing

opportunity costs, and economic growth.

3

LO1

Introduction

Originated

from ancient

Greek word

oikos nomos

--

“One who

manages a

household.”4

LO1

Introduction

Economic wants are

unlimited.

Resources are limited.

5

Scarcity arises

because wants are

unlimited and

resources are limited.

Economics is

the study of

how society

manages its

scarce

resources!

LO1

Art or Science?

Is

economics

an Art or a

Science?

6

LO1

Art or Science?

7

Natural scientists can test with much greater precision

than can economists. They have the advantage of

controlled laboratory experiment.

LO1

Art or Science?

8

Economists

must test

their

theories

using the

real world

as their

laboratory.

?

LO1

Art or Science?

Or is it a

dismal

science?

9

A science like Maths or

Physics usually gets its

satisfaction from proving

something to be irrevocably

true.

Economics, on the other

hand, can rarely give a

simple answer.

Ask five economists a

question and you’ll get six

different answers!

LO1

Art or Science?

10

Economics is a

social science

concerned with the

efficient use of

scarce resources to

achieve the

maximum

satisfaction of

economic wants!

LO1

Scarcity and Choice

Resources are

scarce. Wants are

unlimited.

Hence, people have

to make choices.

Every choice has a

trade-off — giving up

one thing to get

something else.

11

Examples:

Guns v. butter

Food v. clothing

Leisure time versus work

LO1

Scarcity and Choice

Opportunity cost is what you give up to

get what you want.

12

What is

your

opportunity

cost of

attending

college?

LO1

13

What do Steve

Jobs, Michael

Dell, Bill Gates,

Sir Richard

Branson and

Simon Cowell

have in

common?

http://blog.newsok.com/fashionmatters/files/2010/05/simon-cowell.jpg

LO1

Scarcity and Choice

Is scarcity same as poverty?14

LO1

Scarcity and Choice

There’s no free

lunch!

Anything of any

value that is

offered for “free”

still has a cost.

15

The resources that

were used to

provide the free

lunch could have

been put to an

alternative use!

LO1

The Economic Perspective

Thinking like an economist.

Key features:

1) Scarcity and choice

2) Purposeful behavior

3) Marginal analysis

16

LO1


Scarcity and Choices: Economics recognizes

that there is a general condition of scarcity that

forces individuals and society to make choices.

Purposeful Behavior: Economics assumes

that private or public decision-making is based

on “rational self-interest.”

Marginal Analysis: Economics focuses on

marginal analysis when making an economic

decision.

17

LO1


People compare

extra benefits (MB)

and extra costs (MC)

before making

decision.

Marginal means

“extra”.

18

Best

decisions

are made

by thinking

at the

margin.

LO1

Pop Quiz

Given the following estimates of the benefits and

costs, what is the optimal or efficient number of

hospital beds according to economic theory?

No. of beds Total Benefits Total Costs

0 - -

1000 $11 million $4 million




19

LO1

Pop Quiz

Airlines can raise profits by thinking

at the margin. How? 20

LO1

Theories, Principles, and Models

Economists use the scientific method to

establish theories, principles and models.

21

The scientific method:

Observe Formulate a hypothesis Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

Form a theory, principle or model

LO1

So, you aspire to be an economist?

22

LO2


Theories, principles, and models are “purposeful

simplifications.”

Principles are used to explain and/or predict the

behavior of individuals and institutions.

Economic principles:

• Generalizations

• Other-things-equal or ceteris paribus

assumption

• Graphical expression

23

LO2


Generalizations: Economic principles are

expressed as the tendencies of the typical or

average consumer, worker, or business firm.

“Other things equal”: In order to judge the effect

one variable has upon another it is necessary to

hold other contributing factors constant.

Graphical Expression: Many economic

relationships are quantitative, and are

demonstrated efficiently with graphs.

24

LO2


They are generalizations relating to

economic behavior.

They reflect tendencies or averages

across large groups that may not

apply to a particular individual.

Example: If the price of a product

drops significantly, the quantity

demanded among consumers as a

group is expected to increase. But,

some consumers may not increase

their purchases. 25

Why are

economic

theories

and

principles

imprecise?

LO3

Microeconomics and Macroeconomics

Microeconomics focuses on “the individual

parts of the economy.”

● How households and firms make decisions and how

they interact in specific markets.

Macroeconomics looks at the “economy as a

whole.”

● Economy-wide phenomena like inflation,

unemployment, economic growth.

26

LO3

Macroeconomics is a general overview examining

the beach, not the sand, rocks,

and shells.

27Microeconomics is an examination of sand, rocks, and

shells, and not the beach.

LO3

Pop Quiz

28

Indicate whether each one pertain to microeconomics

or macroeconomics?

1) “The inflation rate in the United States hit its lowest

level in the last twenty years.”

2) “The profits of Microsoft rose 20 percent during the

past quarter.”

3) “The nation’s economy grew at an annual rate of

3.7 percent in the final quarter of the year.”

4) “General Motors plans to spend $800 million on a

new automobile plant.”

LO3

Positive and Normative Economics

Positive economics

Deals with economic

facts.

When an economist

is asking about why

things are in the way

they are, we are

facing a positive

question.

29

Normative economics

A subjective perspective

of the economy.

When an economist

wonders how things

should be, then we have

a normative issue.

LO3

Positive and Normative Economics

Positive economics

Example: Big tax

cuts will help many

people, but

government budget

constraints make

that option

infeasible.

30

Normative economics

Example: We should

cut taxes in half to

increase disposable

income levels.

LO3

Pop Quiz

31

Indicate whether it is positive or normative economics.

1) The government should provide free tuition to all

university students.

2) An effective way to increase the skills of the work force

is to provide free tuition to all university students.

3) The Graduate Training Scheme will increase the skill

requirements of workers in Malaysia.

4) Students should work very hard in order to do well in

the final examinations.

LO4

Individual’s Economizing Problem

Individual faces limited income and unlimited wants.

A budget line shows the various combinations of

two products a consumer can purchase with a

specific money income.

The model assumes two goods, but the analysis

generalizes to all goods available to consumers.

The location of a budget line depends on a

consumer’s money income, and the prices of the

two products under analysis.

32

LO4


6

5

4

3

2

1

0

0

2

4

6

8

10

12

DVDs$20

Books$10

$120 Budget 12

10

8

6

4

2

02 4 6 8 10 12 14

Quantity of Paperback Books

Qu

an

tity

of

DV

Ds

Income = $120

Pdvd = $20= 6

Income = $120

Pb = $10= 12

Attainable

Unattainable

33

If income = $120. Price of DVDs = $20. Price of books = $10.

LO4


Points on or inside the budget line represent

points that are attainable given the relevant income

and prices.

Points outside the budget line are unattainable.

The negative slope of the budget line represents

the trade off that consumers must make in their

consumption decisions.

The value of the slope measures the opportunity

cost of one more unit of a good under analysis.

34

LO4


Income changes will shift the budget line.

Greater income will shift the line out and to

the right, allowing consumers to purchase

more of both goods.

Lower income will shift the line in and to

the left, allowing consumers to purchase

less of both goods.

35

LO4

Individual’s Economizing ProblemIf income rises to $160. Price of DVDs = $20. Price of books

= $10.

36

Income = $160

Pdvd = $20= 8

Income = $160

Pb = $10= 16

12

10

8

6

4

2

0 2 4 6 8 10 12 14 16Quantity of Paperback Books

Qu

an

tity

of

DV

Ds

LO4

Society’s Economizing Problem

Society faces scarce resources

and unlimited desires.

• Land

• Labor

• Capital

• Entrepreneurial Ability

37

LO5

Production Possibilities Model

A production possibilities curve (PPC) shows the

maximum amounts of two goods that can be produced,

assuming the full use of available resources.

Points on the curve represent maximum possible

combinations of robots and pizza that can be produced

given the availability resources and technology.

Points inside the curve represent underemployment

of resources.

Points outside the curve are unattainable at present.

38

LO5


A PPC is drawn based on the

following assumptions:

• Full employment

• Fixed resources

• Fixed technology

• Two goods

39

LO5

Production Possibilities Table

Type of Product

Pizzas(in hundred thousands)

Industrial Robots(in thousands)

Production Alternatives

A B C D E

10 9 7 4 0

0 1 2 3 4

Plot the Points to Create the Graph…

40

LO5

Production Possibilities Curve

Pizzas

Ind

ustr

ial R

ob

ots

Attainable

0 1 2 3 4 5 6 7 8 9

14

13

12

11

10

9

8

7

6

5

4

3

2

1

Unattainable

A

B

C

D

E

U

The slope of the

PPC becomes

steeper,

demonstrating

increasing

opportunity cost.

The increasing

opportunity costs

makes

the PPC concave.

41

LO6

Production Possibilities Curve

Economic rationale for the concave PPC:

1) Economic resources are not uniform.

2) To get increasing amounts of pizza,

resources not particularly well suited for the

purpose of making pizza must be used.

For example, workers that are accustomed

to producing robots on an assembly line

may not do well as kitchen help.

42

LO6

A Growing Economy

There are 3 main sources of

economic growth:

1) Discovery of more resources

2) Improved resource quality

3) Technological advances

43

Type of Product

Pizzas(in hundred thousands)

Industrial Robots(in thousands)

Production Alternatives

A' B' C' D' E'

14 12 9 5 0

0 2 4 6 8

A Growing Economy

LO6

44

LO6

A Growing Economy

Pizzas

Ind

ustr

ial R

ob

ots

Attainable

0 1 2 3 4 5 6 7 8 9

14

13

12

11

10

9

8

7

6

5

4

3

2

1

Unattainable

A

B

C

D

E

Economic

Growth

Now Attainable

A’

B’

C’

D’

E’

45

LO5


The decision as to how to

allocate resources in the

present will create more or

less economic growth in the

future.

Using resources to invest in

technological advance,

education, and capital goods

involves sacrificing present

consumption for greater

future consumption. 46

LO6

Present Choices, Future Possibilities

Goods for the Present

Goods for

the F

utu

re

Goods for

the F

utu

re

Goods for the Present

P

F

Current

Curve

Current

Curve

Future

CurveFuture

Curve

Presentville Futureville

47

LO6

International Trade

A nation can also avoid the output limits of its

domestic production possibilities through

international specialization and trade.

Specialization

and trade have

the same

effect as

having more

and better

resources of

improved

technology.48

Documents

Topic 1 Introduction microeconomics