Dr.

Katherine Sauer

Principles of Microeconomics

ECO 2020

I. What is economics? Economics is the study of the use of scarce resources which have alternative uses.

What do we mean by scarce? Human desires exceed our resources. What do we mean by resources? time, money, fresh water, your skills

What do we mean by alternate uses? What are 3 things you could spend your time on?

What are 3 things you could spend your money on?

What are 3 careers you could pursue that would utilize your skills?

Economics studies the consequences of the decisions that are made about the use of scarce resources.

Decisions are made by individuals groups firms governments

Microeconomics focuses on the decision making of economic actors (e.g. consumers, producers). Macroeconomics focuses on economy-wide phenomena (e.g. unemployment).

II.

10 Basic Principles of Economics

A. How People Make Decisions Principle #1 People Face Tradeoffs Infinite options for spending your time but time is scarce you face tradeoffs. Infinite options for spending your money but money is scarce you face tradeoffs.

Think of a tradeoff that you recently faced. What were the options you were deciding between? Why did you go with the option you chose?

Recognizing that people face trade-offs does not by itself tell us what decisions they will or should make.

A common tradeoff for society is between efficiency and equity.

efficiency = getting the most out of a scarce resource

equity = equally distributing resources

Principle #2: The Cost of Something is What You Give Up To Get It Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. Costs are not simply monetary in nature. The opportunity cost of an item/action includes any money cost as well as any forgone opportunities.

What is your personal opportunity cost of being in class today?

What is the opportunity cost of a college education?

What is the opportunity cost of spending tax dollars on national health care?

Principle #3: Rational People Think at the Margin Rational means only doing things when the benefits outweigh the costs.

Rational people know that decisions in life are rarely black and white but usually involve shades of gray.
The term marginal is used to describe small incremental adjustments to an existing plan of action. (decisions are rarely all-or-nothing)

While you are studying for an economics exam, you decide whether or not to study another hour. marginal benefit vs marginal cost

While you are at a party, you decide whether or not to stay for a bit longer. marginal benefit vs marginal cost

Principle #4: People Respond to Incentives An incentive is something that induces a person to act - the prospect of a punishment - the prospect of a reward Why do we tax cigarettes? Why do parents often give their kids allowances?

Why must I give exams and homework in this class instead of inviting you to learn the material on your honor?

B. How People Interact Principle #5: Trade Can Make Everyone Better Off Modern economies are based on the concepts of specialization and trade. At the individual level, we specialize in a skill, get paid to do it, and trade the money to buy other things. Firms specialize in the production of certain goods/services and purchase the inputs needed. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.

Pair/Trio Question
Your roommate is a better cook than you are. You are an adequate cook but a way faster cleaner than your roommate. Explain how specialization and trade could make you both better off. Share your intended majors/careers with each other. Explain how this is a form of specialization and how you will be trading to get the other things you want in life.

Principle #6: Markets are Usually a Good Way to Organize Economic Activity
Communist countries worked on the premise that government officials were in the best position to allocate the economy's scarce resources. Government decides: -what goods and services were produced - how much was produced - who produced and consumed these goods and services

In a market economy, the decisions of a central planner are replaced by the decisions of firms and households.
Government is still needed in a market economy.

Principle #7: Governments Can Sometimes Improve Market Outcomes The invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. - property rights, sound currency, justice system

Also, the market doesnt work well in all situations: 1. externalities (impact of one person's actions on the well-being of a bystander) - pollution 2. non-profitable goods - basic research 3. concentrated market power - monopolies

C. How the Economy as a Whole Works

Principle # 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services Almost all variation in living standards is attributable to differences in countries' productivity. - amount of goods and services produced from each unit of labor input

Principle #9: Prices Rise When the Government Prints Too Much Money In almost all cases of large or persistent inflation, the culprit is growth in the quantity of money. When a government creates large quantities of the nation's money, the value of the money falls.

Principle #10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
Over the short run, many economic policies push inflation and unemployment in opposite directions. This short-run trade-off plays a key role in the analysis of the business cycle.

III. Assignment for the next class 1. Register for and log in to our course website. Look around and note any questions that you have about it. - electronic textbook & interactive homework

2. Read the syllabus and note any questions that you have about it.
3. Complete the chapter 1 worksheet, due at the beginning of next class.