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INTRODUCTORY MICROECONOMICS

Instructor:Filip Vesely

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Instructor (Lectures): Filip VeselyOffice: Room 2356 E-mail: [email protected]

Teaching Assistants (Tutorial Sessions):

Hong Fuhai (Tutorials T1A and T1B) Hu Lin (Tutorial T1C)Office: Room Office: RoomOffice Hours: Office Hours:E-mail: [email protected] E-mail: [email protected]

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Syllabus (1)

Instructor (Lectures): Filip VeselyOffice: Room 2356 E-mail: [email protected]

Teaching Assistants (Tutorial Sessions):

Jiang Ting (Tutorials T2A and T2B) Hu Lin (Tutorial T2C)Office: Room Office: RoomOffice Hours: Office Hours:E-mail: [email protected] E-mail: [email protected]

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TextbookParkin: Microeconomics.

7th International Edition, Pearson Addison-Wesley.

Topics:Chapter 1: What is economics?Chapter 2: The economic problemChapter 3: Demand and supplyChapter 4: ElasticityChapter 5: Efficiency and equityChapter 6: Markets in actionChapter 7: Utility and demandChapter 8: Possibilities,

preferences and choices

Chapter 9: Organizing productionChapter 10: Output and costsChapter 11: Perfect competitionChapter 12: MonopolyChapter 13: Monopolistic competition

and oligopolyChapter 16: Public goods and taxesChapter 18: Externalities

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Grading

Regular and timely class attendance is expected. The following rules will be enforced:

(1) If you are more than 10 minutes late, you should not enter the classroom.

(2) Once in class, you should stay until the class is over. (If you know you have to leave early, ask the instructor’s permission before the class starts.)

(3) You should not do things during class that disrupt the class or distract your classmates - such as snoring, eating or talking while the instructor is lecturing.

(4) If you have a computer, pager or phone, turn if off when you are in class.

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Grading

Cumulative Final Exam: 40 % (Will be scheduled at the end of semester.)

Midterm Exam: 30 % (It is tentatively scheduled for the 8th week.)

Quizzes and Participation: 30 %

There will be a short weekly quiz at your tutorials.

In addition, there will be few unannounced quizzes during your lectures.

Score from your worst quiz will not be counted.

If you miss an exam or a quiz due to illness or a recognized university function, provide a written excuse from your physician or the appropriate university official to your TA and make-up or other suitable action will be arranged.

WHAT IS ECONOMICS?

CHAPTER

After studying this chapter, you will be able to:Define economics and distinguish between microeconomics and macroeconomics

Explain the big questions of economics

Explain the key ideas that define the economic way of thinking

Explain how economists go about their work as social scientists

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What is theeconomic problem?

Definition of Economics

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Providing for people’s

wants and needs

in a world of scarcity



We want more than we can get.Because we face scarcity, we must make choices.

The choices we make depend on the incentives we face.(An incentive is a reward that encourages or a penalty that discourages

an action.)

Economics is the social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

We want more than we can get.


MicroeconomicsMicroeconomics is the study of choices made by individuals and businesses, and the influence of government on those choices.

MacroeconomicsMacroeconomics is the study of the effects on the national and global economy of the choices that individuals, businesses, and governments make.

Two big questions summarize the scope of economics:

How do choices end up determining what, how, and for whomgoods and services get produced?

When do choices made in the pursuit of self-interest also promote the social interest?

Two Big Economic Questions

What?Goods and services

= objects that people value and produce to satisfy wants.

What we produce changes over time.

Sixty years ago, almost 25 %of Americans worked on farms: Today that number is 3 %.

Today, almost 80 % of Americans provide services.


The facts about what we produce raise the deeper question:

What determines the quantities new homes, DVD players, and rice that we produce?


How?Goods and services are produced by using productive resources that economists call factors of production.

Factors of production are grouped into four categories:

Land

Labor

Capital

Entrepreneurship


The “gifts of nature” that we use to produce goods and services are land.

The work time and effort that people devote to producing goods and services is labor.

The quality of labor dependson human capital, which is

the knowledge and skill that people obtain from education,on-the-job training, and workexperience.


The “gifts of nature” that we use to produce goods and services are land.

The work time and effort that people devote to producing goods and services is labor.

The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.

The tools, instruments, machines, buildings, and other constructions that are used to produce goods and services are capital.

The human resource that organizes land, labor, and capital is entrepreneurship.


For Whom?Who gets the goods and services depends on the incomes that people earn.

Land earns rent.Labor earns wages.

Capital earns interest.Entrepreneurship earns profit.


When is the Pursuit of Self-Interest in the Social Interest?Every day, six billion people make economic choices that result in “What,” “How,” and “For Whom” goods and services get produced.

Do we produce the right things in the right quantities?

Do we use our factors of production in the best way?

Do the goods and services go the those who benefit most?

You make choices that are in your self-interest—choices that you think are best for you.

Choices that are best for society as a whole are said to be in the social interest.

Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest?

The Economic Way of Thinking

(1) Choices and TradeoffsThe economic way of thinking places scarcity and its implication, choice, at center stage.

You can think about every choice as a tradeoff—an exchange—giving up one thing to get something else.

What?” Tradeoffs arise when people choose how to spend their incomes, when governments choose how to spend their tax revenues, and when businesses choose what to produce.

How?” Tradeoffs arise when businesses choose among alternative production technologies.

For Whom?” Tradeoffs arise when choices change the distribution of buying power across individuals. Government redistribution of income from the rich to the poor creates the big tradeoff—the tradeoff between equality and efficiency.


(2) Choices Bring ChangeWhat, how, and for whom goods and services get produced changes over time. The speed of change depends on choices that also involve tradeoffs:

We face tradeoffs betweenenjoying current consumption and leisure time and increasing future consumption, and leisure time.

If we save more, we can buy more capital and increase our production.If we take less leisure time, we can educate and train ourselves to become more productive.


(3) Opportunity Cost = thinking about a choice as a tradeoff

The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen.

(4) Choosing at the MarginPeople make choices at the margin, which means that they evaluate the consequences of making incremental changes in the use of their resources.

The benefit from pursuing an incremental increase in an activityis its marginal benefit.

The opportunity cost of pursuing an incremental increase in an activity is its marginal cost.


(5) Our choices respond to incentivesFor any activity, if marginal benefit exceeds marginal cost, people have an incentive to do more of that activity

If marginal cost exceeds marginal benefit, people have an incentive to do less of that activity.

(6) Human Nature, Incentives, and InstitutionsEconomists take human nature as given and view people as acting in their self-interest.

But if human nature is given and people pursue self-interest, how can the social interest be served?

Right institutions can create incentives so people behave in the social interest. (Paramount: the rule of law that protects private property and facilitates voluntary exchange in markets.)

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