ECONOMICS 201 INTRODUCTION TO MICROECONOMICS Spring 2001ECONOMICS IS ABOUT DECIDINGEXAMPLES OF SOME DECISIONS ECONOMISTS HAVE ANALYZEDFactors in decision makingHow individual decisions affect othersPowerPoint PresentationMethodology: Positive v. Normative EconomicsSlide 8Models and theoriesContents of modelsA model of heightsA better (nonlinear) model of heightsA better model?Gender effects in the better modelMODEL SUMMARYAN ECONOMIC MODEL The Production Possibility CurvePPF DEFINEDPPC EXAMPLEPRODUCTION POSSIBILITY CURVESlide 21Slide 23Slide 25OPPORTUNITY COST DEFINEDThe PPC can show opportunity costSlide 28OPPORTUNITY COST INCREASES AS MORE OF A GOOD IS PRODUCEDSlide 30Slide 31Introduction slide 1ECONOMICS 201INTRODUCTION TO MICROECONOMICSSpring 2001Introduction slide 2ECONOMICS IS ABOUT DECIDINGEconomists do not restrict themselves to considering only decision problems involving money and markets, though that is a big part of economics.Introduction slide 3EXAMPLES OF SOME DECISIONS ECONOMISTS HAVE ANALYZEDWhether to buy a car this week.Whether to have pizza for dinner tonight, or something else.Whether to marry your sweetheart.How hard to study for this course.Whether to go to college, and if so, which one.Whether to buy a lottery ticket in the Michigan lottery.Introduction slide 4Factors in decision making1. People face tradeoffs.2. Opportunity cost.3. Making decisions at the margin.4. People respond to incentives.Introduction slide 5How individual decisions affect others5. Trade (exchange) can benefit everyone.6. Markets are often a good way to organize exchange.7. Government can sometimes improve on markets.Introduction slide 6MICROECONOMIC AGENTSFirms–Produce and sell goods and services–Buy inputs (labor, capital & raw materials)Consumers–Buy goods and services–Sell inputs (labor services, loanable funds)Introduction slide 7Methodology: Positive v. Normative EconomicsPositive econ. -- Studies the way the world is.How much will a new gasoline tax raise the price of gasoline?Will an increase in the minimum wage increase unemployment?Why is the price of corn $4.20 per bushel?How much will a drought in the corn belt raise the price of corn? Of wheat?What will be the effect on Byron Brown’s pizza consumption if we take $1000 away from Tom Izzo and give it to Brown?Introduction slide 8Normative econ. -- Studies the way the world should be.Should there be a new tax on gasoline?Should there be an increase in the minimum wage?Should $1000 be taken from M. Peter McPherson and given to Byron Brown?What should the price of corn be?Methodology: Positive v. Normative EconomicsIntroduction slide 9Models and theoriesModel -- a hypothesis about the relationships among variables.Everyone uses models.Because a model abstracts from reality it makes mistakes.Models can contain two kinds of errors or mistakes:the wrong explanatory variables may be included.the functional form may be incorrect.Introduction slide 10Contents of modelsList of variables, especially a clear statement of what is to be explainedDependent v. independent variablesHypothesized relationships among the variables.Using tables of values, graphs, or equations.Introduction slide 11A model of heightsage in yearsheightH = a + b(A)aHAb = H/AIntroduction slide 12A better (nonlinear) model of heightsnaive (linear)age in yearsheightfancyIntroduction slide 13A better model?Height = f(age, gender, parents’ heights, nutrition, ...)Introduction slide 14Gender effects in the better modelHeight = f(age, gender, parents’ heights, nutrition, ...)heightagemenwomenIntroduction slide 15MODEL SUMMARYThree ways to describe modelsGraphsTables of valuesMathematical functions (equations)Important conceptsDependent and independent variablesLinear function, intercept and slopeIntroduction slide 16AN ECONOMIC MODELThe Production Possibility CurvePurposes of modelShow scarcity constraintIllustrate economic efficiencyIntroduce opportunity cost conceptVariablesQuantities of goods that may be producedGivensTotal amounts of inputs availableTechnology of productionIntroduction slide 17PPF DEFINEDThe Production Possibility Curve (or frontier) shows the maximum amount of a good you can produce given the amounts of other goods produced, and given the total amounts of inputs available, and given the technology of production.Introduction slide 18PPC EXAMPLEAssumptions: There are only two goods, pizza and spaghetti.There are limited inputs and given technology of production.Definition:The PPC shows the maximum amount of pizza you can produce, given the amount of spaghetti to be produced.Introduction slide 19PRODUCTION POSSIBILITY CURVESPAGHETTIPIZZAWhich points are attainableand which points are unattainable?Which points are attainableand which points are unattainable?01002003004000 10 20 30 40 50 60Go to hidden slideIntroduction slide 21PRODUCTION POSSIBILITY CURVESPAGHETTIPIZZAWhat’s the effect of an improvementin the technology for producing spaghetti?What’s the effect of an improvementin the technology for producing spaghetti?01002003004000 10 20 30 40 50 60Go to hidden slideIntroduction slide 23PRODUCTION POSSIBILITY CURVESPAGHETTIPIZZAWhat’s the effect of an increase in total resources (inputs)?What’s the effect of an increase in total resources (inputs)?01002003004000 10 20 30 40 50 60Go to hidden slideIntroduction slide 25Points “inside” the PPC are inefficient.For any point “inside” there corresponds some point that represents more production of both goods.Note that while points on the PPC are efficient, we cannot say at this time whether some are better for society than others.Introduction slide 26OPPORTUNITY COST DEFINEDThe opportunity cost of doing something is what you must give up in order to do it.The cost of a pizza is what you must give up to consume it, which in this case is easily computed in money.The cost of a college education includes both money and other foregone alternatives. For example, the cost of a year at MSU includes not only tuition and books, but the income you could have earned working on a full time job.The cost of attending a Lugnuts baseball game includes the value of the time you could have spent studying economics.Introduction slide 27The PPC can show opportunity costSuppose you are at some point on a PPC.Then suppose you want to consume one more pizza.The opportunity cost of one more pizza is the amount of spaghetti you must give up in order to get it.Note that this opportunity