ECONOMICS 2420Principles of

Microeconomics

Important Information

E-mail Communication- Use mtmail or D2L for all communications pertaining to the course.

Use of cellphones or other electronics gadgets are not allowed because it is a distraction to your neighbor and me. Please put them silent during class period.

We have Econ Lab assisted by MA and Ph. D students who can answer most your questions during lab hours, if you need them.

A conducive Learning Environment

Come to class on time and stay until it is over.

Come to class with a purpose to learn economics, not to do other things.

Ask questions, if you don’t understand.

Take notes as relevant to learn.

A conducive Learning Environment

Bring Good attitude + Love of wisdom +Smile (laughter, humor)=> conducive learning environment.

Learning and teaching are two way processes.

I pledge to do my best to make the course relevant and I request that you also do your part to lean something you can take away.

Why Study Economics? 3Reasons

Helps individuals to make rational choices, or decisions for maximizing their welfare (satisfaction). Some examples include:

(major, working vs attending school,

allocating time to different activities, choosing a mate, making informed decisions in civic duties, evaluating economic platform of candidates for public office, etc.)

Why Study Economics? 3Reasons

Guides companies (firms) to make efficient resource allocation decisions to maximize profit.

Helps non-profit organizations (schools, hospitals, museums, churches, etc.) to maximize service to their clients.

Why Study Microeconomics

It’s useful for◦ Personal Decisions◦ Business Decisions◦ Political Decisions

It pays◦ Economics majors end up making more money on

average relative to many other majors

2008 Average Starting Salaries

Major SalaryComputer Science $56,921

Engineering $56,336Economics $52,926Nursing $52,129Chemistry $52,125Finance $48,795Accounting $47,413Bus./Mgt $43,823Source: MSN Careers mancareerbuilder.com

1. What is economics all about ?

It deals with : a. scarcity of productive resources -Labor (doctors, lawyers, teachers,

etc.) -Capital ( physical & financial ) -Land ( minerals, petroleum ) -Management or Entrepreneurship

(CEO)

b. choices ( individual, regional, national,

and international levels)

1. What is economics all about ?

c. Efficiency - getting the most output from scarce resources

d. Equity – fair distribution of benefits or goods and services.

Economics is the study of mankind in the ordinary business of life ( Alfred Marshall-1791)

Allocation of parking spaces, deciding how many credit hours to take, deciding what to major (business vs LA, Sciences) considering career opportunities, working or going to school, etc. are all economic decisions

2. How does an economic problem arise?

• An economic problem arises from the fact human wants are unlimited relative to the limited resources to satisfy them.

• Examples: about 40 million people are in the US are uninsured; some people go hungry; some parts of the city don’t have well paved roads; not all people can afford to buy fruits and vegetables, or grow them? Why?

3. The Scarcity-Choice-Opportunity Framework

• This refers to the fact that because of the scarcity of resources, we have to make choices of how to use them and the choices we make entail a cost known as opportunity cost (OC)

4. Opportunity Cost (OC)

• OC- the value of the best forgone alternative.• OC is the highest valued alternative that must

be given up to engage in an activity• OC is what you give up to get something else

(Mankiw)• Example: What is the OC of working? Going to

school? Attending 3 hours of football game?

4. An Example of Constant Opportunity CostBudget =$5.00; PHD= $0.50; PHAM=$1.00

Option Hotdogs Hamburgers OC A 10 0 _ B 8 1 2 C 6 2 2 D 4 3 2 E 2 4 2 F 0 5 2

Graphical Illustration

What is the OC of the 1st , 2nd, 3rd , 4th, and 5th Ham?

Hotdogs

Ham5

10

OC= -2/1 => sacrifice/gain

A Case of Constant OC

Note: 1) the opportunity cost of each additional hamburger is the 2 hotdogs which must be given up. This is a case of constant OC.

Note : 2) A constant OC implies prefect substitution of resources. Not

realistic in many instances.

5. Every society must answer three basic questions.

What to produce? Consumers

How to produce? Firms

Who gets the goods and services produced? Two Approaches: Market and Social Policy

. Mechanisms of resource allocation in different

economic systems

Laissez Fare Economy: Market forces of supply and demand.

State makes the resource allocation in a command economy.

Mixed Economy: Market and state make resource allocation decisions (US and others).

Ten Principles of Economics (Mankiw)

A. How People Make Decisions?

Principle # : 1 People Face Tradeoffs

Principle # : 2 =>The Cost of Something is What You Give Up to Get It (OC).

Principle # : 3 =>Rational People Think at the Margin.

Principle # : 4=> People Respond to Incentives.

B. How people Interact

Principle # : 5 Trade Can Make Everyone Better Off.

Principle # : 6 Markets are Usually a Good

Way to Organize Economic

Activity.

Principle # : 7 Governments Can Sometimes

Improve Market Outcomes

C. How the Economy as Whole Works

Principle # :8 A Country’s Standard of living Depends on Its Ability to Produce Goods and Services

Principle # :9 Prices Rise When the Government Prints Too Much Money

Principle # :10 Society Faces a Short-Run Tradeoff Between Inflation and Unemployment