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Chapter One

Introduction

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Chapter Outline

• 1.1 Microeconomics: The Allocation of Scarce Resources

a. Trade-Offs

b. Who Makes the Decisions

c. Prices Determine Allocations

d. How Prices Determine Allocations

• 1.2 Modelsa. Simplifications by Assumption

b. Testing Theories

c. Maximizing Subject to Constraints

d. Positive Versus Normative

• 1.3 Uses of Microeconomic Modelsa. Uses of Microeconomics by Individuals and Governments

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What is Microeconomics?

• Economics– The study of the allocation of scarce resources among alternative uses

• Microeconomics– The study of the economic choices individuals and firms make to allocate the scarce resources and how those choices create markets

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Economic Models

• Simple theoretical descriptions that capture the essentials of how the economy works– Used because the “real world” is too complicated to describe in detail

– Models tend to be “unrealistic” but useful

• While they fail to show every detail (such as houses on a map) they provide enough structure to solve the problem (such as how a map provides you with a way to solve how to drive to a new location)

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Economic Models

• Simplifications by assumption– Regardless of how the model is described, an economic model is a simplification of reality that contains only its most important features.

• Testing theories– Economic theory is the development and use of a model to test hypotheses, which are predictions about cause and effect.

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• Maximizing subject to constraints– A key assumption in most microeconomic model is that individuals allocate their scarce resources so as to make themselves as well off we possible

• Positive versus normative– positive statement

• testable hypothesis about cause and effect.

– normative statement• conclusion as to whether something is good or bad

Economic Models

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Example

Which of the following is an example of a positive statement?

A) Since this good is bad for you, you should not consume it.

B) If this good is bad for you, you should not consume it.

C) If you consume this good, you will get sick.

D) None of the above.

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The Production Possibility Frontier

• A graph showing all possible combinations of goods that can be produced with a fixed amount of resources

• Figure 1.1 shows a production possibility frontier where the goods are food and clothing produced per week– At point A, 10 units of food and 3 units of clothing can be produced

– At point B, 4 units of food can be produced and 12 units of clothing

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FIGURE 1.1: Production Possibility Frontier

Amountof food

per week

4

10A

B

Amountof clothing

per week

0 3 12

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The Production Possibility Frontier

• Without more resources, points outside the frontier are unattainable– This demonstrates a basic fact that resources are scarce

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Opportunity Cost

• The cost of a good or service as measured by the alternative uses that are foregone by producing the good or service

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FIGURE 1.1: Production Possibility Frontier

Amountof food

per week

4

9.510

A

B

Opportunity cost ofclothing = ½ pound of food

Opportunity cost ofclothing = 2 poundsof food

2

Amountof clothing

per week

0 3 4 1213

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Uses of Microeconomics

• While the uses of microeconomics are varied, one useful way to categorize is by types of users– Individuals making decisions regarding jobs, purchases, and finances

– Businesses making decisions regarding the demand for their product or their costs

– Governments making policy decisions regarding laws and regulations

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APPLICATION : Is It Worth Your Time to Be Here?

• The typical U.S. college student pays about $18,000 per year in tuition, fees, and room and board charges. One might conclude then, that the “cost” of 4 years of college is about $72,000.

- A number of studies have suggested that college graduates earn more than those without such an education.

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Providence University, Taiwan Sept 15, 2008

Declining MOE Subsidy to Each College Student, Taiwan 教育部補助每大學生經費

Source: MOE, Taiwan http://140.111.34.54/statistics/index.aspx

0

2

4

6

8

10

12

14

16

18

20

Year

Public

18.12 16.78 17.78 15.82 15.44 15.45 14.63 13.84 12.99 12.03 11.78

Private

1.30 1.34 1.51 1.72 1.89 2.13 2.13 2.05 2.07 1.97 1.99

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Public

Private

(in

ten

thou

sand

s N

T$)

(Public: US$ 4000) (Private: US$ 600)

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各級學校平均每生分攤經費

學年度 69 70 71 72 73 74 75 76 77

專科學校33,658 41,041 54,622 54,124 56,260 56,888 64,689 48,066 55,549

大學及獨立學院61,006 79,889 95,632 83,256 89,704 97,666 119,285 142,284 140,782

學年度 78 79 80 81 82 83 84 85 86

專科學校64,215 66,050 78,027 81,729 85,954 83,786 87,792 100,096 92,192

大學及獨立學院161,547 188,484 200,211 204,730 204,795 195,870 198,611 213,401 171,730

學年度 87 88 89 90 91 92 93 94 95 96

專科學校 95,998 109,253 91,499 116,784 113,948 140,618 131,820 121,804 104,737 124,889

大學及獨立學院 160,713 162,184 169,906 152,275 158,866 160,950 165,178 173,195 175,263 182,913

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各級學校平均每生分攤經費

0

50,000

100,000

150,000

200,000

250,000

69 72 75 78 81 84 87 90 93 96

學年度

金額( )元

專科學校 大學及獨立學院

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各級學校平均每生分攤經費_平減民國 95年消費者物價指數

學年度 69 70 71 72 73 74 75 76 77

專科學校52,459 62,136 81,586 80,867 84,184 84,542 95,637 70,159 77,658

大學及獨立學院95,084 120,952 142,841 124,393 134,227 145,142 176,353 207,684 196,815

學年度 78 79 80 81 82 83 84 85 86

專科學校86,206 85,579 96,772 98,469 99,472 93,532 95,085 107,434 97,321

大學及獨立學院216,871 244,214 248,308 246,663 237,004 218,654 215,110 229,045 181,284

學年度 87 88 89 90 91 92 93 94 95 96

專科學校 101,157 113,699 95,232 121,790 119,168 144,714 132,602 121,804 102,885 118,502

大學及獨立學院 169,350 168,783 176,838 158,801 166,143 165,637 166,158 173,195 172,164 173,559

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各級學校平均每生分攤經費_平減民國 95年消費者物價指數

0

50000

100000

150000

200000

250000

300000

69 72 75 78 81 84 87 90 93 96學年度

金額( )元

專科學校 大學及獨立學院