Principles of Microeconomics ECON 103 2024/25 PDF

Principles of Microeconomics ECON 103 – 2024/25 Dr. Hussain Muhammad 1  CH 1: Thinking Like an Economist Introduction The word Economy comes from the Greek word “oikonomos”, which means “one who manages a household.” Economic...

Principles of Microeconomics ECON 103 – 2024/25 Dr. Hussain Muhammad 1  CH 1: Thinking Like an Economist Introduction The word Economy comes from the Greek word “oikonomos”, which means “one who manages a household.” Economics is the study of how society manages its scarce resources. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. 2  CH 1: Thinking Like an Economist Microeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth etc. 3  CH 1: Thinking Like an Economist The Economist as Scientist Like an Economist Economists study the economy the same way a physicist approaches the study of matter, and a biologist approaches the study of life. Develop theories, collect data, and then analyze these data in an attempt to verify or refute their theories. Economists do not work with test tubes or telescopes. They develop and test theories about how the world works. This method of inquiry is as applicable to studying a nation’s economy as it is to studying the earth’s gravity or a specie’s evolution. 4  CH 1: Thinking Like an Economist The scientific method: Observation, theory, and more observation Observation is a way to gather data by watching people, events, or noting physical characteristics in their natural setting. For example, the chair of the department observes a teacher teaching a lesson from a written curriculum to determine whether he or she is delivering it with fidelity. Observations help us to develop theory. Data can be collected and analysed to test and evaluate economic theories. 5  CH 1: Thinking Like an Economist The Economist as Policy Advisor When economists are trying to explain how the world works, they are scientists. When economists are trying to change or improve the world, they are policy advisor. 6  CH 1: Thinking Like an Economist Positive vs. Normative Statements Positive statements are statements that attempt to describe the world as it is. Called descriptive analysis Normative statements are statements about how the world should be. Called prescriptive analysis Normative statements contain words like ‘should’, ‘ought’ and ‘must not’ or value words like ‘better’. No evidence can demonstrate a normative statement to be true or false. 7  CH 1: Thinking Like an Economist Example: Positive vs. Normative Statements Suppose that two people are discussing minimum-wage laws. Here are two statements you might hear: Polly: Minimum-wage laws cause unemployment. Smith: The government should raise the minimum wage. Polly and Smith differ in what they are trying to do. Polly speaks like a scientist: She is making a claim about how the world works. Smith is speaking like a policy adviser: He is making a claim about how he would like to change or improve the world. 8  CH 1: Thinking Like an Economist The Role of Economists in Policy Advisors to Policymakers Economists use their models and data to provide insights to governments, businesses, and other organizations. Example: Advising on tax policy, minimum wage, healthcare reform. Differences in Views: Economists may disagree due to different assumptions, interpretations of data, or normative beliefs. Example: Debate over the effectiveness of fiscal policy during a recession. 9  CH 1: Thinking Like an Economist Economic Models Economists use models, diagrams, and equations to learn about the world. For example; The Circular-Flow Diagram It is a visual model of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services (where households are buyers and firms are sellers) and in the markets for the factors of production (where firms are buyers and households are sellers). In the next slide the outer set of arrows shows the flow of dollars, and the inner set of arrows shows the corresponding flow of inputs and outputs. 10  CH 1: Thinking Like an Economist The Circular-Flow Diagram MARKETS Revenue FOR Spending GOODS AND SERVICES Goods Firms sell Goods and and services Households buy services sold bought FIRMS HOUSEHOLDS Produce and sell Buy and consume goods and services goods and services Hire and use factors Own and sell factors of production of production Factors of MARKETS Labor, land, production FOR and capital FACTORS OF PRODUCTION Wages, rent, Households sell Income and profit Firms buy = Flow of inputs and outputs = Flow of dollars 11  CH 1: Thinking Like an Economist Summary The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. Economists develop ideas, assumptions, and build simplified models to understand the world around them. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than scientists. Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values. 12