Micro Economics ECO 2023 The Economic Approach Chapter 1 Micro 1 Identify and list the critical components of economics 2 List and provide examples of the eight guideposts of economic thinking 3 Distinguish between two types of economics statements 4 Avoid making four common mistakes What is Economics about Economics tries to explain a predict the behavior of consumers firms and government Scarcity leads to tradeoffs which result in making choices Historically mechanisms that have been used to deal with the problem of scarcity 1 Force 2 Tradition emphasized past ways relied on families 3 Authority government and church 4 Market 5 Combination of 1 4 Scarcity requires that some wants remain unfulfilled Issues of equity justice and fairness are embedded with scarcity Class perspective We will focus on the market process of dealing with scarcity At times we will compare and contrast with the government or collective process Do not confuse the market process as being the same as politically conservative The economic way of thinking 8 guidelines 1 There are always tradeoffs what you give up is your opportunity cost value of your next best alternative there is no such thing as a free lunch 2 Individuals chose purposefully referred to as economizing behavior try to get the most benefits for the least cost or effort AKA as rational behavior 3 Incentives matter As the incentives goes up you will be more likely to do something or try to and vice versa the incentive doesn t have to be money 4 Think on the Margin not in total or on average Marginal means additional or Marginal benefit is additional benefit marginal cost is additional cost Continue to engage in an activity as long as the expected marginal benefit is greater than the 5 More information leads to better decision making but more information is costly to 6 Many choices create a secondary effect The primary effect is often immediate and visible the secondary effect usually comes later and is not visible 7 Value is subjective Beauty is in the eyes of the beholder value is determined by the 8 Economic thinking is scientific thinking Economists use data and information generated by people to explain and predict actions incrementally expected marginal cost get purchaser Positive and Normative Economics distinguish between two types of economic statements Pages 1 3 and Essays in positive material Pitfalls to avoid in economic thinking Don t make one of these errors 1 Violation of Ceteris Paribus other things constant we want to isolate variables so we typically allow only one to change at a time 2 Good intentions do not necessarily result in good outcomes there is nothing that does so much harm as good intentions Milton Friedman 3 Association is not causation just because two things are similar and have a correlation do not mean they are causing the other one 4 Fallacy of composition Assumption what s good for the individual is good for the group making this assumption when its false is the fallacy Micro Chapter 2 Some tools of the Economist 1 Define and recognize examples of opportunity costs on your own 2 Discern why voluntary trade creates value 3 Realize why property rights are key to economics progress 4 Illustrate the concepts of tradeoffs opportunity 5 List society s three question and specify the kinds of economic organization When people trade one person gains while another person loses When people trade both people gain Wealth is actually created by trade Voluntary trade creates wealth and promotes economic progress with or without production with or without money exchanges voluntary trade is expected to benefit both parties involved A transaction cost is a momentary or nonmonetary barrier that lowers the benefits of trade Property rights change the incentives for individuals When there are private rights there is more often times to get better and not get abused Then once it is publicly owned it is not owned Potential trades 1 Finished goods exchanged through barter 2 Finished goods exchanged for money 3 Business buying resources 4 Consumers buying products The importance of property rights 1 Common rights everybody owns it 2 Private rights only one person owns it Supplemental video Stossel private property Incentives created by Private property rights Give proper care Conserve for the future Use the resources in ways other people value Mitigate possible harm to others Production Possibilities Curve PPC also called PPF frontier Good 1 Anything on the line is efficient inside the curve is in efficient could do better and anything outside the curve is unattainable at the time Good 2 The PPC can shift outward growth produce more The PPC can shift inward Shrink produce less doesn t happen often Getting a car would help social satisfaction but would not help you get knowledge Trade output and living standards Law of Comparative Advantage Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost Translation make something your good at and trade for something you are not good at Importance of comparative advantage Low opportunity cost Comparative advantage Specialization Division of Labor Voluntary trade Increased Wealth Self sufficiency is the quickest and most absolute path to poverty Economic Organization chapter 2 economic organization list societies three question to specify the kinds of economic organization Chapter 3 Supply Demand and Market process 7 learning goals 1 Investigate and describe consumer behavior 2 Distinguish a chance in demand from a change in quantity demanded 3 Investigate and describe firm behavior 4 Distinguish a change in supply from a change in quantity supplied 5 Build a market model and illustrate how equilibrium is reached and demonstrate how markets respond to change in demand and supply 6 Recognize how prices and the invisible hand principle create market order Consumer Choice and the Law of Demand Quality Allow only one variable to change at a time to follow Ceteris Perribis How much you buy The Law of Demand is the inverse relationship between price and quantity demanded when price rises quantity demanded falls When the price goes down the quantity demanded goes up while the price goes up the quantity demanded goes down This is always a number this is how many units of a good you bought Ways to express the Law of Demand 1 Words 2 Tables 3 Math Equation 4 Pictures or Graph Price The curve can be either curved or straight Quantity
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