Welcome to Econ 110Welcome to Econ 110

Econ 110

Introduction to Economic Theory

Section 2

Professor Tanya Rosenblat

Fall 2007

What is EconomicsWhat is Economics

Economics is a

1 Social Science

2 A Business Tool

As a Social Science Exploration of the consequences of - Rationality

- Selfishness

- Equilibrium

As a Business Tool Subject that studies the market forcesthat govern the creation and distribution

of value in the marketplace

EXAMPLESEXAMPLES

1 Water Diamonds what determines value

2 Why so many new textbook editions

3 Renting or Selling what is better

4 Why is popcorn in theaters so expensive

5 Which auction maximizes revenue

6 To Lead or to Follow what is better

PRINCIPLESPRINCIPLES

1 People face Tradeoffs No ldquoFree Lunchrdquo

2 The Cost of Something is what you give up to get it

3 Rational People think at the Margin

4 Rational People react to Incentives

Econ 110Econ 110 Grade Components Grade Components

Homework (individual or team)10

(8 best out of 10)

Final examination 40

(December 10 )

Midterms 20 each

(Oct 17 and Nov 14)

More information on exams will be provided as the dates of exams approach

No homework due the first week No homework due the weeks of

midterms

+ Class Participation

10

GradingGrading

Final course average is determined according to the following formula

[01 homework] + [02 midterm1] +[02 midterm2] +

[04 final]+ [01 class participation]

bull Upward trend in performance will be rewarded I will weigh final more if your perform substantially better on the final

bull Students who do poorly in Econ 110 tend to be those who donrsquotcome to class and donrsquot do the reading and problems sets

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

What is EconomicsWhat is Economics

Economics is a

1 Social Science

2 A Business Tool

As a Social Science Exploration of the consequences of - Rationality

- Selfishness

- Equilibrium

As a Business Tool Subject that studies the market forcesthat govern the creation and distribution

of value in the marketplace

EXAMPLESEXAMPLES

1 Water Diamonds what determines value

2 Why so many new textbook editions

3 Renting or Selling what is better

4 Why is popcorn in theaters so expensive

5 Which auction maximizes revenue

6 To Lead or to Follow what is better

PRINCIPLESPRINCIPLES

1 People face Tradeoffs No ldquoFree Lunchrdquo

2 The Cost of Something is what you give up to get it

3 Rational People think at the Margin

4 Rational People react to Incentives

Econ 110Econ 110 Grade Components Grade Components

Homework (individual or team)10

(8 best out of 10)

Final examination 40

(December 10 )

Midterms 20 each

(Oct 17 and Nov 14)

More information on exams will be provided as the dates of exams approach

No homework due the first week No homework due the weeks of

midterms

+ Class Participation

10

GradingGrading

Final course average is determined according to the following formula

[01 homework] + [02 midterm1] +[02 midterm2] +

[04 final]+ [01 class participation]

bull Upward trend in performance will be rewarded I will weigh final more if your perform substantially better on the final

bull Students who do poorly in Econ 110 tend to be those who donrsquotcome to class and donrsquot do the reading and problems sets

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

EXAMPLESEXAMPLES

1 Water Diamonds what determines value

2 Why so many new textbook editions

3 Renting or Selling what is better

4 Why is popcorn in theaters so expensive

5 Which auction maximizes revenue

6 To Lead or to Follow what is better

PRINCIPLESPRINCIPLES

1 People face Tradeoffs No ldquoFree Lunchrdquo

2 The Cost of Something is what you give up to get it

3 Rational People think at the Margin

4 Rational People react to Incentives

Econ 110Econ 110 Grade Components Grade Components

Homework (individual or team)10

(8 best out of 10)

Final examination 40

(December 10 )

Midterms 20 each

(Oct 17 and Nov 14)

More information on exams will be provided as the dates of exams approach

No homework due the first week No homework due the weeks of

midterms

+ Class Participation

10

GradingGrading

Final course average is determined according to the following formula

[01 homework] + [02 midterm1] +[02 midterm2] +

[04 final]+ [01 class participation]

bull Upward trend in performance will be rewarded I will weigh final more if your perform substantially better on the final

bull Students who do poorly in Econ 110 tend to be those who donrsquotcome to class and donrsquot do the reading and problems sets

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

PRINCIPLESPRINCIPLES

1 People face Tradeoffs No ldquoFree Lunchrdquo

2 The Cost of Something is what you give up to get it

3 Rational People think at the Margin

4 Rational People react to Incentives

Econ 110Econ 110 Grade Components Grade Components

Homework (individual or team)10

(8 best out of 10)

Final examination 40

(December 10 )

Midterms 20 each

(Oct 17 and Nov 14)

More information on exams will be provided as the dates of exams approach

No homework due the first week No homework due the weeks of

midterms

+ Class Participation

10

GradingGrading

Final course average is determined according to the following formula

[01 homework] + [02 midterm1] +[02 midterm2] +

[04 final]+ [01 class participation]

bull Upward trend in performance will be rewarded I will weigh final more if your perform substantially better on the final

bull Students who do poorly in Econ 110 tend to be those who donrsquotcome to class and donrsquot do the reading and problems sets

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Econ 110Econ 110 Grade Components Grade Components

Homework (individual or team)10

(8 best out of 10)

Final examination 40

(December 10 )

Midterms 20 each

(Oct 17 and Nov 14)

More information on exams will be provided as the dates of exams approach

No homework due the first week No homework due the weeks of

midterms

+ Class Participation

10

GradingGrading

Final course average is determined according to the following formula

[01 homework] + [02 midterm1] +[02 midterm2] +

[04 final]+ [01 class participation]

bull Upward trend in performance will be rewarded I will weigh final more if your perform substantially better on the final

bull Students who do poorly in Econ 110 tend to be those who donrsquotcome to class and donrsquot do the reading and problems sets

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

GradingGrading

Final course average is determined according to the following formula

[01 homework] + [02 midterm1] +[02 midterm2] +

[04 final]+ [01 class participation]

bull Upward trend in performance will be rewarded I will weigh final more if your perform substantially better on the final

bull Students who do poorly in Econ 110 tend to be those who donrsquotcome to class and donrsquot do the reading and problems sets

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

bull Class participation and attendance ndash Not Compulsory but appreciated Please let me know if you cannot

attendbull Course readings

ndash Stiglitz and Walsh Economicsndash Additional readings distributed through course website

bull Problem sets ndash Individual or Group homework assignments to be turned in (no more

than 4 persons)bull Review session Review sessions weekly on Tue at 7 pm in PAC 004

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Classroom Etiquette Responsibilities and Classroom Etiquette Responsibilities and ExpectationsExpectations

bull My responsibility I will be on-time for every class (indeed I will usually be 5 minutes early)

ndash My reciprocal expectation you will try to be in your seats and ready to go at the beginning of the hour

bull My responsibility I will remain in the classroom intensely focused on your learning for the duration of the class

ndash My reciprocal expectation please do not get up from the class and then return later

bull My responsibility To surprise you with ideas and insights

ndash To do this I need to ask that you not read ahead in the chapters especially when we are doing an experiment

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Last Warning What Economics Last Warning What Economics Offers and Does Not OfferOffers and Does Not Offer

bull Economics does NOT offerndash Simple recipes for dealing with every conceivable

problembull Economics does offer

ndash Frameworks of enduring value that can enable your intuition harness your creativity and help you think through a broad range of issues

ndash A honing mechanism that helps you identify the data that is most relevant for dealing with complex ambiguous problems

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

What is Economics

bull Economics in general is about the allocation of scarce resources

bull What is produced bull How is it produced bull Who produces and gets paid for it What does it cost bull Who buys it and whybull You canrsquot have it all ldquoTradeoffsrdquo ldquoThe Dismal Sciencerdquo Real life

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Macro and Micro

bull Macro Aggregate economic behavior and performance of economy Inflation unemployment exchange rates wealth interest rates income distribution

bull Micro Focus on individual economic decision-makers and behavior and performance of markets for goods services and productive inputs (price of gasoline wages of consultants innovation in computer technology)

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

What is Microbull Economic behavior of individual consumers and

producers (firms)bull Interactions between consumers and firms in markets

for goods and services the role of prices and the ldquolaws of supply and demandrdquo

bull Behavior and performance (prices costs efficiency) of markets for goods and services including labor and capital

bull Perfectly competitive markets monopoly imperfect competition

bull Analyze effects of public policies sales taxes price controls antitrust information and disclosure government subsidies environmental regulations on costs prices social welfare consuming and producing groups

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Consumers Producers Markets

bull In this course we examine consumers producers and how they interact in markets

bull Consumers choose what goods and services to buy by maximizing their utility or satisfaction subject to their scarce income or budget constraint Consumers are rational given their information

bull Producers (firms) are constrained by technology prices for inputs (labor capital raw materials) production from competing firms and what consumers are willing to pay (demand) for their products

bull Firms choose output and prices (supply) to maximize profits subject to these constraints

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Consumers Producers Markets

bull Consumers (demand) and producers (supply) interact in markets to trade money for goods and services

bull Markets determine prices assigned to goods and services and to scarce productive inputs (labor capital raw materials)

bull Prices play a central role in microeconomics and determine how scarce resources are allocated what is produced how is it produced and who gets it The central questions of economics

bull Prices are signals that convey information to consumers and firms and ultimately link millions of consumers and thousands of firms

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Consumers Producers Markets

bull Prices tell consumers how much different goods and services cost and allow them to decide whether to consume more or less of a good or service (demand) given how much they value them (utility or preferences) and their budget constraints

bull Prices tell producers how much consumers are willing to pay for what they produce and how much revenue they will receive if they producer alternative quantities (supply)

bull Prices for inputs (wages capital) indicate what it will cost to produce so firms can decide whether to produce more or less and how to produce the products to reduce costs and increase profits (revenues ndash costs)

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Economic Modelsbull We try to approach these economic problems

scientifically but individual human behavior is complicated driven by many factors and cannot be fully explained by simple precise mathematical relationships (eg E = mc^2 )

bull We rely on simple theoretical models to understand consumer and producer behavior and price formation in markets of different kinds A model is any description of a relationship between two or more economic variables (eg prices and quantities sold)

bull These models are based on many assumptions which may sometimes seem unrealistic (eg consumers have good information about product prices and qualities offered by competing firms)

bull We then relax these assumptions to see how market behavior and performance change

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Theoretical vs Empricalbull Theoretical economics is the process of building

models to explain economic relationships (when prices rise consumers buy less ndash the law of downward sloping demand)

bull Empirical economics is the process of testing models and measuring the parameters of established economic relationships (eg (if the prices of gasoline rises does consumption fall and by how much -- elasticity of demand for gasoline)

bull Some economic phenomena are hard to explain empirically

bull Why do people wait in line for four hours for a Britney Spears concert and why can scalpers charge 5 times the face value of the tickets

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Perfect vs Imperfect Competitionbull One of the key sets of assumptions that must be made in

micro theory is to characterize the nature of competition in various markets

bull We always start with ldquoperfectly competitiverdquo markets Perfect competition relies on many assumptions that may all be satisfied for only a few products (eg wheat) Students find this annoying

bull But perfect competition is a good starting point and many economic relationships can be understood well even in markets that donrsquot satisfy all of the assumptions

bull We will go on to examine alternative markets structures (eg monopoly cartels) and many other market imperfections

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Positive vs Normativebull Positive economics focuses on explaining economic

phenomena without making judgments about whether they are good or bad

bull Why is Wesleyanrsquos tuition $36536year Why is it almost identical to Williamsrsquo and Brownrsquos tuition

bull What happened to oil prices before and after the war in Iraq started on March 20 2003

bull Normative economics seeks to evaluate whether market outcomesare good bad or could be improved upon with changes in market structures or with the application of government policies that affect market outcomes (eg controls on pollution) Normative economics uses phrases like efficiency social welfare consumer welfare equity etc that reflect specific normative criteria which may or may not themselves be controversial

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Policy AnalysisMicroeconomics is often used to examine the effects of

various government policies- minimum wage (ldquoliving wagerdquo)- sales taxes- antitrust policies (Microsoft)- farm subsidies (wheat butter milk etc)- safety standards (pharmaceuticals)- pollution regulations (global warming)- price controls (electricity prices)- information disclosure (Enron)- patent and copyright policies

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Economics Can Be Funbull Economics is about real life decisions made by

individuals as consumers and producers It can be applied to many phenomena that we encounter in every day life and care about as citizens It is of enormous value in public policy analysis

bull By the end of this course you should be able to think and speak intelligently about issues like the following

- raising the minimum wage- alternative approaches to controlling pollution- government restrictions on Microsoftrsquos behavior- behavior of oil prices and effects of price controls- how to make investment decisions- how to evaluate insurance policies- why did Enronrsquos CEO earn 100 times more than Michael

Roth

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Production Functionbull Production refers to the conversion of inputs the factors of

production into desired output A production function for a particular good or service is often written as follows

Xi = f(LKMR) bull where Xi is the quantity produced of a particular good or

service andbull 1048698 L represents the quantity and ability of labor input

available to the production processbull 1048698 K represents capital input machinery transportation

equipment and other types of intermediate goodsbull 1048698 M represents land natural resources and raw material

inputs for production andbull 1048698 R represents entrepreneurship organization and risk-

taking

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Example 1 One Good Only Labor Input Variable

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Example 1 One Good Only Labor Input Variable

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Production function with diminishing marginal productivity of labor

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Two Goods Labor Supply = 7

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of

good 2 by one marginal unit

bull Marginal Rate of Transformation = the slope of the transformation frontier

bull This ratio measures the opportunity cost of using resources in producing one good in terms of the alternative use of those resources used in the production of the other good Given diminishing marginal productivity as resources are allocated away from good Y towards good X the opportunity cost (|MRT|) of producing more of good X increases

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples

Examples

bxay

MRT = |yrsquo| = b

cyx 22

0)()( 212212 xcxxcxy

• Welcome to Econ 110
• What is Economics
• EXAMPLES
• PRINCIPLES
• Econ 110 Grade Components
• Grading
• Slide 7
• Classroom Etiquette Responsibilities and Expectations
• Last Warning What Economics Offers and Does Not Offer
• Slide 10
• Macro and Micro
• Slide 12
• Consumers Producers Markets
• Slide 14
• Slide 15
• Slide 16
• Theoretical vs Emprical
• Perfect vs Imperfect Competition
• Positive vs Normative
• Policy Analysis
• Economics Can Be Fun
• Production Function
• Example 1 One Good Only Labor Input Variable
• Slide 24
• Production function with diminishing marginal productivity of labor
• Two Goods Labor Supply = 7
• Slide 27
• MRT (of good 1 for good 2) ndash How much can output of good 1 increase if the firm decreases the output of good 2 by one marginal unit
• Examples