Micro Economics ECO 2023The Economic Approach Chapter 1 Micro1. Identify and list the critical components of economics2. List and provide examples of the eight guideposts of economic thinking3. Distinguish between two types of economics statements4. Avoid making four common mistakesWhat is Economics about?Economics tries to explain a predict the behavior of consumers firms and governmentScarcity leads to tradeoffs which result in making choicesHistorically, mechanisms that have been used to deal with the problem of scarcity1. Force2. Tradition (emphasized past ways, relied on families)3. Authority (government and church)4. Market5. Combination of 1-4Scarcity requires that some wants remain unfulfilledIssues of equity, justice, and fairness are embedded with scarcityClass 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 conservativeThe economic way of thinking8 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 lunch2. Individuals chose purposefully- referred to as economizing behavior- try to get the mostbenefits for the least cost or effort, AKA as rational behavior3. 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 money4. Think on the Margin, not in total or on average- Marginal means additional or incrementally.Marginal benefit is additional benefit, marginal cost is additional costContinue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost5. More information leads to better decision making, but more information is costly to get6. 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 purchaser8. Economic thinking is scientific thinking- Economists use data and information generated by people to explain and predict actions.Positive and Normative Economics- distinguish between two types of economic statementsPages 1-3 and Essays in positive materialPitfalls to avoid in economic thinkingDon’t make one of these errors1) Violation of Ceteris Paribus (other things constant), we want to isolate variables so we typically allow only one to change at a time2) Good intentions do not necessarily result in good outcomes “there is nothing that does so much harm as good intentions” Milton Friedman3) Association is not causation- just because two things are similar and have a correlation do not mean they are causing the other one4) 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 2Some tools of the Economist1) Define and recognize examples of opportunity costs (on your own)2) Discern why voluntary trade creates value3) Realize why property rights are key to economics progress4) Illustrate the concepts of tradeoffs opportunity5) List society’s three question and specify the kinds of economic organizationWhen people trade one person gains while another person losesWhen people trade both people gain- Wealth is actually created by tradeVoluntary 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.Potential trades:1) Finished goods exchanged through barter2) Finished goods exchanged for money3) Business buying resources4) Consumers buying productsA transaction cost is a momentary or nonmonetary barrier that lowers the benefits of tradeThe importance of property rights1) Common rights- everybody owns it2) Private rights- only one person owns itProperty 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.Supplemental video: Stossel private propertyIncentives created by Private property rights:- Give proper care- Conserve for the future- Use the resources in ways other people value- Mitigate possible harm to othersProduction Possibilities CurvePPC also called PPF (frontier)The PPC can shift outward: growth, produce moreThe PPC can shift inward: Shrink produce less doesn’t happen oftenTrade, 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 atImportance of comparative advantage: Low opportunity cost Comparative advantage Specialization Division of Labor Voluntary trade Increased WealthSelf sufficiency is the quickest and most absolute path to povertyGood 1Good 2Anything on the line is efficient, inside the curve is in-efficient (could do better), and anything outside the curve is unattainable at the time.Getting a car would help social satisfaction but would not help you get knowledgeEconomic Organization: chapter 2 economic organization list societies three question to specify the kinds of economic organizationChapter 3 Supply, Demand, and Market process7 learning goals1. Investigate and describe consumer behavior2. Distinguish a chance in demand from a change in quantity demanded3. Investigate and describe firm behavior4. Distinguish a change in supply from a change in quantity supplied5. Build a market model and illustrate how equilibrium is reached and demonstrate how markets respond to change in demand and supply6. Recognize how prices and the invisible hand principle create market orderConsumer Choice and the Law of DemandThe 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:How much you buyQualityAllow only one variable to change at atime to follow Ceteris Perribis1. Words2. Tables3. Math
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