Microeconomics Chapter 1 Economics and Life Overview How economists explain o Scarcity o Opportunity o Incentives o Efficiency How economists distinguish between o Correlation and causation o Positive and normative analysis What characterizes a good economic model What is economics Study of how people Manage Resources The Study of choices people make o Not just money Useful in other fields as well Choices and Rational Behavior Economists assume o People are aware of all costs and benefits of their actions o People always compare all available choices o People intentionally behave in the way that best achieves their goals Rational Behavior 2 Fields This assumption explains the real world in an economic context Microeconomics the study of choices people and companies make and the implications of their decisions o Individual actions Macroeconomics The study of economy on a regional national or international level People s choices 4 main factors o Scarcity what are their wants and constraints o Opportunity cost what are the trade offs o Incentive how will other people respond o Efficiency why isn t everyone doing it Scarcity People make decisions based on what they want People want things but are constrained by limited resources Resources of an individual person would be things like time and money Scarcity when wants exceed available resources Opportunity cost What is being given up Every choice someone makes has a cost and a benefit Costs can be direct costs or opportunity costs Direct costs are all costs associated with buying something Opportunity cost is the value someone gives up by making a choice for something else o This is the value of the next best alternative Not all possible alternatives o This could be more than one thing Cost and value vary depending on the person Marginal decisions People compare additional benefits o Marginal benefit Incentives Rational behavior shows how people respond to incentives An incentive is something that causes a change in the tradeoffs people face o Positive incentive makes people more likely to do something lowers o Negative incentive makes people less likely to do something higher opportunity cost opportunity cost Efficiency what they want Under normal circumstances individuals and firms seek opportunities to get o Firm busisness o If a profit can be made someone will provide a good or service This leads to efficiency resources are used to produce goods and services with the best economic value 3 Factors of Efficency Innovation new ideas increase efficiency Market failure people may not capture the benefit or incur additional costs Intervention government involvement disrupts market Correlation and Causation Correlation a consistently observed relationship between 2 events o Positive correlation increase in A and B o Negative correlation Increase in A decrease in B Causation a relationship between 2 events in which one invokes the other Reasons why there may be no relation between events Correlation without causation o Both happen at the same time but one has no influence over the other Omitted variables Models o 2 things are closely related due to a third unconsidered event Models are a simplification of complex problems o Includes individuals and their choices o Study specific markets Models are used to predict how people act in certain situations Positive and Normative analysis Positive factual explanation about how the world works o Supported by legitimate evidence Normative the way things should be o Idealistic opinion that lacks proper evidence
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