University Microeconomics Introduction

8/13/2019 University Microeconomics Introduction

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A set of principles for understandingthe economics of how individuals make

choices

A set of principles for understandinghow economies work through the

interaction of individual choices

A set of principles for understandingeconomy-wide interactions

C O P Y R I G H T 2 0 1 3 W O R T H P U B L I S H E R S

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Individual Choice: The Principles

1. Choices are necessary because

resources are scarce.



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Resources and Scarcity

Resource: anything that can be used to produce

something else.

Scarce: in short supply; a resource is scarce when

there is not enough of the resource available to

satisfy all the various ways a society wants to use

it.



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Principle# 1

Choices Are Necessary Because Resources Are Scarce

A resource is anything that can be used to produce

something else.

Examples: land, labor, capital

Resources are scarce – the quantity available isn’t

large enough to satisfy all productive uses.Examples: petroleum, lumber, intelligence


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2. The true cost of something is its opportunity

cost.

Opportunity cost: what you must give up in order

to get something.

Mark Zuckerberg understood

the concept of opportunity

cost — and dropped out ofHarvard.



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Principle# 2

The True Cost of an Item Is Its Opportunity Cost

The real cost of an item is its opportunity cost: what youmust give up in order to get it.

Opportunity cost is crucial to understanding individualchoiceExample: The cost of attending an economics class is what youmust give up to be in the classroom during the lecture. Sleep?Watching TV? Rock climbing? Work?

All costs are ultimately opportunity costs.


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Principle# 3

“How Much?” Is a Decision at the Margin

You make a trade-off when you compare the

costs with the benefits of doing something.

Decisions about whether to do a bit more or a bit

less of an activity are marginal decisions.


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Marginal Analysis

Making trade-offs at the margin: comparing the

costs and benefits of doing a little bit more ofan activity versus doing a little bit less.

The study of such decisions is known asmarginal analysis.

Examples: Hiring one more worker, studying one

more hour, eating one more cookie, buying one

more CD, etc.


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Active Learning: Discussion


New York City Mayor Michael Bloomberg proposed aban on the sale of any sugary beverage over 16 ouncesin any of the city's restaurants, delis, movie theaters,and street carts.

“Obesity is a nationwide problem, and all over theUnited States, public health officials are wringingtheir hands saying, ‘Oh, this is terrible.’ New YorkCity is not about wringing your hands; it’s aboutdoing something. I think that’s what the public

wants the mayor to do,” Bloomberg told The NewYork Times in making his proposal.

Discuss: Do you agree that soda should be taxed orbanned? Why or why not?To NextActive Learning



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4. People usually respond to incentives,

exploiting opportunities to make themselvesbetter off.


In the United States, restaurant

customers have the option of

adding a tip to the restaurant bill.

In much of Europe a tip is added

automatically.Where would you expect waiters

to be more attentive?


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Principle# 4

People Usually Respond to Incentives, Exploiting

Opportunities to Make Themselves Better Off

An incentive is anything that offers rewards to people whochange their behavior.

Examples:1. Price of gasoline rises people buy more fuel-efficient cars;2. There are more well-paid jobs available for collegegraduates with economics degrees more students major ineconomics

People respond to these incentives.


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Active Learning: Application


Can you spot the problemwith this incentive system?

A juvenile prison inPennsylvania offered judgesbribes the more young

people they sent to jail.

One teen was jailed for aFacebook page that wascritical of her high-school

principal.Both judges pleaded guiltyto accepting $2.6 million inbribes.


To NextActive Learning


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Principle# 5

There Are Gains From Trade

In a market economy, individuals engage in trade:They provide goods and services to others and

receive goods and services in return.

There are gains from trade: people can get more

of what they want through trade than they couldif they tried to be self-sufficient.


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This increase in output is due to specialization: each person

specializes in the task that he or she is good at performing.

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The economy, as a whole, can produce more when each

person specializes in a task and trades with others.

There Are Gains From Trade

“I hunt and she gathers – otherwise we couldn’t make ends meet.”


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Interaction and Individual Choice

6. Markets move toward equilibrium.

Equilibrium: an economic situation in which no

individual would be better off doing something

different.



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Principle# 6

Markets Move Toward Equilibrium

An economic situation is in equilibrium when noindividual would be better off doing something

different.

Any time there is a change, the economy will moveto a new equilibrium.

Example: What happens when a new checkout line opensat a busy supermarket?


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7. Resources should be used efficiently

to achieve society’s goals.

Efficient: taking all opportunities to make somepeople better off without making other people

worse off.



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8. When markets don’t achieve efficiency,

government intervention can improve society’s

welfare.

Sometimes markets fail and need correction.



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Economy-Wide Interactions9. One person’s spending is another person’s

income.



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Economy-Wide Interactions

During recessions, a drop in business spending leads

to:Less income,

less spending…

…and further drops in business spending, layoffs,and rising unemployment.



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Economy-Wide Interactions

12. Government policies can change spending.

C 2 0 1 3 W P

The U.S. government funded the WPA and provided

almost 8 million jobs between 1935 and 1943.

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University Microeconomics Introduction