Economics: Principles of microeconomicsWednesday, April 4, 2012Lecture 2Review:Economics: the study of [how society, which is made up of individual], allocates scarce resources among competing uses for those resourcesA function of fact that we have an unlimited amount of things we want to do, but a limited amount of resources (tangible and intangible) that makes us allocate our time.Methods of Completion- violence- first come, first serve- personal characteristics- legal allocations- marketingRemoving one form of competition does not remove the competition--> the form of competition just moves into some other arenaPreview:- 3 Universal questions-Society's organization-Rule for making the most out of the limited resources1. Three Universal Questions (asked from all types of societies)- What are we going to use the resources to produce?- How are we going to produce?- For whom?Not all societies ask these questions in the same manner.How are all the questions answered?- Traditiono the way it has always been doneo set ways to produce something not a dynamic economy- Central planningall discriminating against those who won't get the goodseasy to explain:"it's always been done this way"Economics: Principles of microeconomicsWednesday, April 4, 2012Lecture 2o Social democratic -elected representatives that can be replaced if unhappyo Autocratic -no feedback system (not many exist, but can relate it to North Korea)- Market: consumers reveal what they want the resources to be used foro tell suppliers what they want and how they'll use it*The market is what we will focus most on*We are so used to having products there at our convenienceSo how does the market do it?HOW ARE ECONOMIC THEORIES JUDGED?- form a hypothesiso needs to be a positive statement- get data- does the hypothesis explain behavior?o Yes, a good theoryo No, not a god theoryNo assumptions can be used for theories; cannot judge a theory based on assumptionsAnalysis of good theories explains behavior.MARGINAL = Additional'if I eat one more bite...""if I sit in this class one more minute..." --> "I lose a minute somewhere else"-Marginal benefit (M.B.) declines the more you do something-Marginal cost (M.C.) increases the more you do something M.B M.C. Want MB > MC Beyond Q*, cost is greater than benefits Once Q* hits, you move on to the next thing Summary of course:If the benefit of an activity is greater than the cost, you will do it.M.B.M.C.Positive statement: a true/false FACT that people can agree upon whether it is true/falseEx. 'the world is flat' -wrong, but based on factNormative statement: based upon valuesEx. 'chocolate is better than vanilla'Reasonable people may disagreeQ*Quantity/Time (Q/T)Economics: Principles of microeconomicsWednesday, April 4, 2012Lecture 2If the benefit of an activity is smaller than the cost, you will NOT do it.Chapter 2: Supply and DemandTrade and specialtyHow we trade in this market PRICE You will consume the same quantity no matter the price Q/T"Need" overlooks 3 interrelated facts:- Nothing is freeo Something distributed at zero cost is not freeo resources were used; expenses into making it- Everything has a substituteo Not necessarily good substituteso Ex. If no more oxygen, then death (bad substitute, but a substitute)- Decisions are made by weighing costs and benefitso Ex. We need a new freeway... Costs or benefits?- That is how we should base our decisions on**What do we WANT and what other WANTS are we willing to GIVE UP**DEMAND.-relates the amounts of consumers are willing and able to purchase w/ various sacrifices (prices)Are consumers willing and able to buy it? (example based on the professor's made up salary)If a yacht was $60,000, and I really wanted a yacht, would I buy it?If my salary was $500,000 a month, I would take six. But with the salary I have now, I would not get any yachts -relating to the prices and