Econ 110 Principles of Microeconomics Welcome! “Economics is common sense made difficult” –As...

Econ 110 Principles of Econ 110 Principles of MicroeconomicsMicroeconomics

Welcome!

•“Economics is common sense made difficult”

– As seen by an undergraduate student

Dr. Anwar Al-Shriaan

Economics Department

Office hours:Sundays and Tuesdays 12:00– 12:50 pm and

by appt.

TodayToday

• Syllabus

• Intro to economics

What will we be studying?What will we be studying?

Eco 110 is the first economic theory course

• basic foundation of economics

• tools of discipline

Look atLook at

• buyer and seller behaviour (markets)

• role of government in markets

• consumer choice

• producer behaviour

• determinants of income and poverty

Why have energy prices risen Why have energy prices risen (fallen)?(fallen)?

Why does price control not work?Why does price control not work?

Is Microsoft a monopoly?Is Microsoft a monopoly?Why do we care?Why do we care?

Is college worth the cost?Is college worth the cost?

What causes the gender wage gap?What causes the gender wage gap?

Why do airlines require a Saturday Why do airlines require a Saturday night stay for a low fare?night stay for a low fare?

Course MaterialsCourse Materials

Required:McConnell and Brue“ Economics“, 16th ed

RecommendedRecommended

course web site• URL at top of the syllabus

• contains– course information

– exam study guides – TA’s

lecture noteslecture notes

• PowerPoint slides

Email listEmail list

• I send email about– Announcements– Course information

• Do you prefer Emails or Facebook groups .

TATA

• Check my website• But please see me too!

Grading PolicyGrading Policy

Midterm 1 30%Midterm 2 30%Recitation and Participations 10%Final 30%

Grading PolicyGrading PolicyLetter grades will be assigned as follows:94.00 – 100.0 % … A90.00 – 93.99 % … A-86.00 – 89.99 % … B+83.00 – 85.99 % … B80.00 – 82.99 % … B-78.00 – 79.99 % … C+73.00 – 77.99 % … C70.00 – 72.99 % … C-66.00 – 69.99 % … D+60.00 – 65.99 % … D59.99 – 0.00 % … F

Grading PolicyGrading Policy

Your Final Grades: 1st Mid + 2nd Mid + Part + Final.If Your Participation > 8.5 you will have Extra credits as follows:

Your Final Grades: 20% X Max (1st Mid, 2nd Mid, Final)

Grading PolicyGrading PolicyYour Final Grades: 1st Mid + 2nd Mid + TA + Part + Final.

If Your Participation > 8.5 you will have Extra credits as follows:

Your Final Grades: 20% X Max (1st Mid, 2nd Mid, Final)

1st Mid (25)

2nd Mid (25)

Part

(10)

Final

(40)

Total

222492882B-

84%88%70% 86 B+

1st Mid (25)

2nd Mid (25)

Part

(10)

Final

(40)

Total

151793677C

60%68%90%82.4 B-

1st Mid (25)

2nd Mid (25)

Part

(10)

Final

(40)

Total

151764076C

68%100%76

151794080B-

86B+

final examfinal exam

• cumulative

Makeup'sMakeup's

• Usually I don’t do it • planned absence: 1 week’s notice• emergencies: case-by-case• must be an excused absence!• must be documented!• makeup's may be essay exams or I may re weight

other exams

AttendanceAttendance

• regular attendance is expected

• you are responsible for information in class

• attendance is necessary to earn extra credit.

Please be respectful of your Please be respectful of your classmatesclassmates

• be on time

• do not talk during lecture

• do not have your phone on

CheatingCheating

• you cheat,• I catch you,

• you fail the course

• programmable calculators (e.g. TI-83),translators, phones, PDAs, etc.

are NOT allowed in exams

Course ScheduleCourse Schedule

• in syllabus

• note exam dates,

• note the final exam date & time

Tips for successTips for success

• come to class with lecture notes to follow• read the book!!• weekly “look-through”• ask for help • ME or • the TA or• ME• use available resources

– course web site

Why you should try to learn something Why you should try to learn something in this course.in this course.

Percentage of wage dispersion explained by skill factors.

Huge variation in earnings of low vs. high-skilledcollege graduates

• if you need special accommodations, see me

• if you are having problems in the course, see me sooner NOT later

Some definitions of economics

• “Economics is a study of mankind in the

ordinary business of life”

•Alfred Marshall

• "the purpose of studying economics is not to acquire a set

of ready-made answers to economic questions, but to learn how to avoid being deceived by

economists."

• Joan Robinson

• “Economics is what economists do”

• Jacob Viner

Economics (1)

• Study of the choices people make to attain their goals given their scarce resources.

Economics: Foundations and Models1. What do economists study?

• gasoline prices, inflation, housing markets, international trade, income inequality, sports, families, smoking, health care, happiness

• decision-making or choices

2. How do they do it?

• by using theories and models

• theories are based on assumptions

What makes a good theory or a model?

• Models are not judged by their realism but by their usefulness

• What is the most useless map in the world?

To be useful a model has to be refutable

Why study theory?

• “I don’t know how it is in theory but here is what I know from my 20 years of experience will happen “

• Laura, Executive MBA student

• Theory saves time!

•When Economists Disagree: A Debate over Outsourcing

Makingthe

Connection

Learning Objective 1.3

Does outsourcing by U.S. firms raise or lower incomes in

the United States?

Economics (2)

• Study of the choices people make to attain their goals given their scarce resources.

Economics

When the price is zero there is not enough for

everyone

People behave as if they are comparing

the costs and benefits

Scarcity Choices

Benefits

Costs

Unlimited wants

Limited availabilit

y

Economics

Everything has alternative uses

Scarcity

Tradeoffs

Opportunity cost

Economics

People are rational when they behave as if they were comparing

costs and benefits

Choices

People respond to incentives

Decisions are made on the margin

as if

• “…getting out of bed in the morning and making breakfast involves more complex decisions than the average game of chess. (Will that fries egg kill me in twenty-eight years?)”

• Charles Wheelan

Economics (3)

• Study of the choices people make to attain their goals given their scarce resources.

Trade-offs force society to make choices, particularly when answering the following three fundamental questions:

1 What goods and services will be produced?

2 How will the goods and services be produced?

3 Who will receive the goods and services produced?

The Economic Problem That Every Society Must Solve

Centrally planned economy An economy in which the government

decides how economic resources will be allocated.

The Economic Problem That Every Society Must Solve

Market economy An economy in which the decisions of households and firms

interacting in markets allocate economic resources.

• Centrally Planned Economies versus Market Economies

Mixed economy An economy in which most economic decisions result from

the interaction of buyers and sellers in markets but in which the government

plays a significant role in the allocation of resources.

The Economic Problem That Every Society Must Solve

• The Modern “Mixed” Economy

Positive analysis Analysis concerned with what is.

Economic Models• Normative and Positive Analysis

Normative analysis Analysis concerned with what ought to

be.

Don’t Let This Happen to YOU!Don’t Confuse Positive Analysis with Normative Analysis

The Market The Market System and System and the Circular the Circular

FlowFlow2C H A P T E R

PROPERTY RESOURCESPROPERTY RESOURCES

1. LAND1. LAND

2. CAPITAL2. CAPITAL

HUMAN RESOURCESHUMAN RESOURCES

3. LABOR3. LABOR

4. ENTREPRENEURIAL ABILITY4. ENTREPRENEURIAL ABILITY

SCARCE RESOURCESSCARCE RESOURCESECONOMIC RESOURCESECONOMIC RESOURCES

Resource payments: correspond to resource Resource payments: correspond to resource categoriescategories

RENTALRENTALINCOMEINCOME

INTERESTINTERESTINCOMEINCOME

WAGESWAGES

PROFIT &PROFIT &LOSSLOSS

PROPERTY RESOURCESPROPERTY RESOURCES

LANDLAND

CAPITALCAPITAL

HUMAN RESOURCESHUMAN RESOURCES

LABORLABOR

ENTREPRENEURENTREPRENEUR

Macroeconomics Starts Here

Economic Systems

• Definition: A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem.

• Economic systems differ as to:

1) who owns the factors of production

2) the method used to motivate, coordinate, and direct economic activity.

The Command System

• The government owns most property resources and economic decision making occur through a central economic plan.

• The central planning board determines production goals for each firm and resources to be allocated.

The Market System

• There is private ownership of resources.

• Markets and prices coordinate and direct economic activity.

• Each participant acts in its own self-interest.

• In pure capitalism the government plays a very limited role.

Characteristics of the Market System

• Private Property.• Freedom of firms to choose.• Self interest.• Competition.• Markets and prices.• Technology and capital goods.• Specialization.• Use of money.• Active, but limited government.

The Circular Flow Model

• There are two groups of decision makers in There are two groups of decision makers in the private economy: households the private economy: households (resource (resource owners)owners) and businesses and businesses (resource users)(resource users)

• The market system The market system (resource markets and (resource markets and product markets)product markets) coordinates these decisions. coordinates these decisions.

What happens in the resource markets? What happens in the resource markets? a.a. Households Households sellsell resources directly or resources directly or

indirectly (through ownership of corporations) to indirectly (through ownership of corporations) to businesses.businesses.

b. Businesses b. Businesses buybuy resources in order to produce resources in order to produce goods and services.goods and services.

c.c. Interaction of these sellers and buyers Interaction of these sellers and buyers determines the determines the price of each resourceprice of each resource, which in , which in turn provides turn provides incomeincome for the owner of that for the owner of that resource.resource.

d.d. Flow of payments from businesses for the Flow of payments from businesses for the resources constitutes business resources constitutes business costscosts and resource and resource owners’ owners’ incomesincomes..

What happens in the product markets?What happens in the product markets?a. Households are on the a. Households are on the buyingbuying side of these side of these

markets, purchasing goods and services.markets, purchasing goods and services.

b.b. Businesses are on the Businesses are on the sellingselling side of these side of these markets, offering products for sale.markets, offering products for sale.

c.c. Interaction of these buyers and sellers determines Interaction of these buyers and sellers determines the price of each product.the price of each product.

d.d. Flow of consumer expenditures constitutes Flow of consumer expenditures constitutes sales receiptssales receipts for businesses. for businesses.

CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTMARKET

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

PRODUCTMARKET

CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

PRODUCTMARKET

CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

CIRCULAR FLOW MODEL

CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

More Realistic Circular Flow

Macroeconomic Policies

Limitations of the model:

1. Does not depict transactions between households and between businesses (inter-businesses).

2. Ignores government and the “rest of the world” in the decision-making process (we will take care of them later on).

3. Does not explain how prices of products and resources are actually determined.