microeconomics econ 2302 summer 2011 marilyn spencer, ph.d. professor of economics introduction to...
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MicroeconomicsECON 2302
Summer 2011
Marilyn Spencer, Ph.D.
Professor of Economics
Introduction to course & Chapter 1
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Please fill out and return index card - PRINT LEGIBLY:
1. Your name
2. year in college (1st, 2nd, etc.)
3. major - or “deciding”
4. ECON course in high school - “yes” or “no”
5. If you’re working this semester, whether as volunteer or for pay, approx. # of hours/week, - or “N/A”
6. Last math class successfully
completed in college - or
“N/A”
7. Last economics class
successfully completed in
college - or “N/A”
8. Usual source of local &
national news
9. Any particular topic you’d
like us to consider as part of
this course
10. Career goal(s)
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Today’s topics: Introduction to course
Introduction to/review of basic economics concepts in Chapter 1
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Online Syllabus – go to my site and make a few clicks:
Contact information Texts Course description Course outline Role of course in you undergraduate curriculum Course methodology Course content Grades
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CHAPTER 1
Economics: Foundationsand Models
Bill Gates, chairman of Microsoft, testified before
Congress in 2008 that limiting the number of foreign
technical workers allowed into the United States was
resulting in a “critical shortage of scientific talent.”
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1
3
4
5
1.1 Three Key Economic IdeasExplain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin.
1.2 The Economic Problem That Every Society Must SolveDiscuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?
1.3 Economic ModelsUnderstand the role of models in economic analysis.
1.4 Microeconomics and MacroeconomicsDistinguish between microeconomics and macroeconomics.
1.5 A Preview of Important Economic TermsBecome familiar with important economic terms.
APPENDIX: Using Graphs and Formulas Review the use of graphs and formulas.
Chapter Outline and Learning Objectives
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Economics: Foundations & ModelsWe use economics to answer questions such as the following:
• How are the prices of goods and services determined?
• How does pollution affect the economy, and how should government policy deal with these effects?
• Why do firms engage in international trade, and how do government policies affect international trade?
• Why does government control the prices of some goods and services, and what are the effects of those controls?
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Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
Economics The study of the choices people make to attain their goals, given their scarce resources.
Economic model A simplified version of reality used to analyze real-world economic situations.
4.1
Economics: Foundations and Models, cont.
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Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
Three Key Economic Ideas
Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas:
1. People are rational.
2. People respond to economic incentives.
3. Optimal decisions are made at the margin.
Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin.
1.1 LEARNING OBJECTIVE
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Economics rationality assumption:
1. People behave rationally. That is, we make rational choices. We generally assume that rational people:
a) Feel that more is better than less.b) Strive to do what will make them better off,
given the information they have.
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Assumption that we respond to incentives:2. People respond to the conditions that we operate
under, by responding to both:
a) Positive incentivesb) Negative incentives
3. People make decisions based on what is currently relevant:
Marginal analysis Analysis that involves comparing marginal benefits and marginal costs, where marginal refers to the benefit or cost of the next, or last, choice.
“Marginal” assumption:
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Implications Being self-interested, people will weigh the costs and
benefits of various alternatives, choosing that alternative that makes them best off at the margin.
This behavior is called “economic decision making.”
Costs and benefits are sometimes referred to as negative and positive incentives. Hence, according to the economic reasoning, incentives matter.
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Will Women Have More Babies if the Government Pays Them To?
Makingthe
Connection
More than 45 countries in Europe & Asia have taken steps to try to raise their birthrates. These policies suggest that people may respond to economic incentives even when making the very personal decision of how many children to have.
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Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service.
Trade-offs force society to make choices when answering the following 3 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 Every Society Must Solve
Opportunity cost The highest-valued alternative that must be given up to engage in an activity.
Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?
1.2 LEARNING OBJECTIVE
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Centrally planned economy An economy in which the government decides how economic resources will be allocated.
Economic Problem Every Society Must Solve, cont.
Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Centrally Planned Economies v. Market Economies
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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.
Economic Problem Every Society Must Solve, cont.
The Modern “Mixed” Economy
What economic agents are involved in a mixed economy? Buyers and sellers
Federal, state and local governments
Private non-profit agencies
Foreign governments
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Productive efficiency A situation in which a good or service is produced at the lowest possible cost.
Economic Problem Every Society Must Solve, cont.
Efficiency and Equity
Allocative efficiency A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
Voluntary exchange A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
Equity The fair distribution of economic benefits.
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To develop a model, economists generally follow these steps:
1. Decide on the assumptions to use in developing the model.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain well the economic data.
5. Retain the revised model to help answer similar economic questions in the future.
Economic Models
Understand the role of modelsin economic analysis.
1.3 LEARNING OBJECTIVE
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Economic models make behavioral assumptions about the motives of consumers and firms.
Economic Models, cont.
The Role of Assumptions in Economic Models
Economic variable Something measurable that can have different values, such as the wages of software programmers.
Forming and Testing Hypotheses in Economic Models
Normative and Positive AnalysisPositive analysis Analysis concerned with what is.
Normative analysis Analysis concerned with what ought to be.
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Should the Federal Government Have Increased Restrictions on the Immigration of Skilled Workers?
Makingthe
Connection
Does restricting the immigration of skilled workers affect the employment opportunities of
recent U.S. graduates?
Like many other policy debates, the debate over the immigration of skilled workers has both positive and normative elements.
The debate over the immigration of skilled workers demonstrates that economics is often at the center of important policy issues.
Understand the role of models in economic analysis.1.3 LEARNING OBJECTIVE
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Economic Models, cont. Economics as a Social Science
Because economics studies the actions of individuals, it is a social science.
Economics is therefore similar to other social science disciplines, such as psychology, political science, and sociology.
As a social science, economics considers human behavior - particularly decision-making behavior - in every context, not just in the context of business.
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Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Microeconomics and Macroeconomics
Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Distinguish between microeconomics and macroeconomics.
1.4 LEARNING OBJECTIVE
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Do Immigrants Displace or Complement Domestic Workers?
AN INSIDE LOOK at Policy
>>
Figure 1. Foreign-Born Scientists and Engineers as a Percentage of All Scientists and Engineers in the United States
Figure 2. Foreign Recipients of U.S. Science and Engineering Doctorates, 1985–2005
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Allocative efficiency
Centrally planned economy
Economic model
Economic variable
Economics
Equity
Macroeconomics
Marginal analysis
Market
Market economy
Microeconomics
Mixed economy
Normative analysis
Opportunity cost
Positive analysis
Productive efficiency
Scarcity
Trade-off
Voluntary exchange
KEY TERMS
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Preview of Important Economic Terms
• Entrepreneur
• Innovation
• Technology• Firm, company, or
business
• Goods
• Services
• Revenue
• Profit
• Household• Factors of production,
or economic resources
• Capital• Human capital
Become familiar with importanteconomic terms.
1.5 LEARNING OBJECTIVE
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If you had to choose only one word to tell someone what economics is
all about, what would that one word be?
?
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Solved Problem 1-1Apple Computer Makes a Decision at the Margin
Should Apple produce an additional 1 million iPhones?
In solving the problem, consider the following:
• Optimal decisions are made at the margin.
• An activity should be continued to the point where the marginal benefit is equal to the marginal cost.
• In this case, the correct decision requires information about additional revenue and additional cost.
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Introduction/Chapter 1 definitions: Syllabus Definitions:
economicsmicroeconomics/macroeconomics resources allocation distribution scarcity opportunity cost marketefficiencyequity
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Quiz 1Before class on Thursday, June 2, send me an email from
the email address you’ll be using regularly during this course.
My email address is [email protected].
3 points
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Questions?
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Reality check, to be completed before our next class:
Read Chapter 1 of Hubbard & O’Brien and be able to answer:
3rd edition Review Questions:
p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 (2nd edition: p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 ; 1st edition: p. 19, 1, 3, 5, 6 & 8)
3rd edition: Problems and Applications:
p. 22, 2.7; p. 23, 3.8 (2nd edition: p. 22, 2.7; p. 23, 3.8 ; 1st edition: p. 20, 13 and 15)
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Reality check, to be completed before our next class: Read Chapter 2 and be able to answer:
3rd edition Review Questions:
p. 58, 1.2, 1.3; p. 60, 2.2; p. 62, 3.1 (2nd edition: p. 60, 1.2, 1.3; p. 62, 2.2; p. 63, 3.1; 1st edition: pp. 56-57, 2, 3, 5, 6 & 11).
3rd edition Problems and Applications:
p. 58-59, 1.4 & 1.8; p. 60, 2.4 (2nd edition: p. 60-61, 1.4 & 1.8; p. 62, 2.4 ; 1st edition: pp. 57 & 59, 1, 5 and 11).
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Reality check, to be completed before we begin Chapter 3:
Read Chapter 3 introduction and major topic headings.
Read Review Questions, 3rd ed.: #1 “In a market system, who ultimately decides which goods
and services will be produced?” p. 90, 1.2, 1.3, 1.4; p. 91, 2.2; p 92, 3.1, 3.2; and also: What happens to the equilibrium price in a market if the demand curve shifts to the right? Draw a demand and supply graph to illustrate your answer. (2nd ed. p. 92, 1.2, 1.3, 1.4; p. 93, 2.2; p. 94, 3.1, 3.2,; 1st edition: 1-8 on pp. 90-91).
Read Problems and Applications, 3rd ed.:
“Is it possible for a good to be an inferior good for one person and a normal good for another? If yes, cite some examples;” and p. 90, 1.7; p 91, 2.3; p. 95, 4.15 (2nd ed., p. 92, 1.7; p. 93, 2.3; p. 96, 4.15; 1st edition: 3, 4, 7, 14 & 21 on pp. 91-93).
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Reality check to have been completed before we begin Ch. 4: Pre-read Ch. 4, including:
Review Questions:Consumer surplus is used as a measure of a consumer’s net
benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit.
Why would economists use a term like “deadweight loss” to describe the impact on consumer and producer surplus from a price control?”
Problems and Applications:3rd ed., p. 130, 4A.5, 4A.6, 4A.7 & 4A.8; (2nd ed., p. 134,
4A.5, 4A.6, 4A.7 & 4A.8; 1st edition: 1-4 on p. 129).