ECO 101: Introduction to Microeconomics PDF - North South University

Key Concepts in Economics Dr. Saima Khan (SaKn) ECO 101: Introduction to Microeconomics Department of Economics, School of Business, North South University Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics...

Key Concepts in Economics Dr. Saima Khan (SaKn) ECO 101: Introduction to Microeconomics Department of Economics, School of Business, North South University Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 1 / 27  Introduction Raise your hands Check out the following questions - which topic can ECONOMICS help us to understand? Post-covid the world was hit by global inflation. The freezing point of milk. How fast people drive on the highway. Do firms continue to produce if they are not making a profit? How the human heart works. How long does a student study for an exam. How long do you wait before you clean your room? What factors could increase the demand for petrol? Why criminals sometimes voluntarily confess to the police? Why do students cheat during exams? Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 2 / 27  Some Key Concepts Choice vs. Scarcity Wants are unlimited but resources are not (i.e. resources are Scarce). Scarcity ⇒ result of infinite wants hitting up against limited resources. ▶ eg 1 - a farmer has a small plot of land. He can grow either rice or bananas there. He cannot grow both at the same time. ▶ e.g.2 - your family has only one car. You need it in the morning to come to university, your dad needs it to go to his office, your younger sibling needs it to go to school - you cannot all use the same car at once! Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 3 / 27  Some Key Concepts Choice vs. Scarcity (continued) Thus have to make Choice. ▶ e.g. 1 - So the farmer makes a choice - he decides to grow rice. ▶ e.g. 2 - So your family has to make a choice - you being the older sibling take the bus to NSU, while your dad drops your younger brother off at school and then goes to work. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 4 / 27  Some Key Concepts Scarcity and Rationing Device Ration (verb) ⇒ a fixed amount of a particular thing. Rationing device ⇒ determines who gets what amount of a given good. Example 1: Pat-a-cake Pat-a-cake Baker’s Man ▶ Say your local bakery produces cakes. ▶ How does the baker decide how many cakes each customer gets? ▶ Obvious answer - dollar price/taka price! ▶ So price is a rationing device - a method of allocate limited amount of goods among people. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 5 / 27  Some Key Concepts Rationing Devices Can you think of some other rationing devices? ▶ First come, first serve ♦ concert tickets, comedy shows, iPhone sales (often combined with primary rationing device = price) ▶ Lottery ♦ H1B visa in the US, education vouchers for private schools. Bittersweet Cafe - previously a sandwich cost BDT 250, now it costs BDT 700. ▶ What role does the rationing device play? ▶ Ans: priced out lower income people, students etc. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 6 / 27  Some Key Concepts Opportunity Cost Opportunity Cost - next best alternative forgone/given up in order to have the BEST alternative. When you come to class at 8 a.m., the next best thing you give up is sleeping for an extra hour. ▶ Thus, NEXT BEST ALTERNATIVE given up is sleeping an extra hour. ▶ Hence, opportunity cost of coming to an 8 a.m. class is sleeping an extra hour. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 7 / 27  Some Key Concepts Opportunity Cost (contd.) But, when you choose to come to class at 8 a.m. some other things you give up are having a big breakfast, watching a late night movie, late night phone conversations. ▶ Then why is sleeping an extra hour the opportunity cost? ▶ Why is having a big breakfast NOT your opportunity cost? ▶ because, it is NOT the next best alternative! Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 8 / 27  Some Key Concepts Opportunity Cost - More Examples Say your aunt gives you BDT 500 as Eidie. You can do a variety of things with this money: ▶ watch a movie. ▶ order food using foodpanda. ▶ repay a loan you took from a friend. ▶ save the money. How to figure out your opportunity cost? ▶ First rank the above options in order of preference. ▶ So your best course of action is (first choice). ▶ The next best alternative you give up is (second choice). ▶ Thus, the opportunity cost of (first choice) is (second choice). Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 9 / 27  Some Key Concepts Rationing Device & Opportunity Cost Case 1: Admissions at All Directions University In Fall 2022, 600 students applied to All Directions University (ADU). The university however had spots for 200 students. The university admissions committee went through the applications and selected students who had a GPA of 3.5 or more (out of 4) in their HSC exams. This narrowed the applicant pool down to 450. The university asked these 450 students to sit for the admission exam. Out of these 450 students, 100 students did not show up on exam day. The admissions committee selected only those students who scored at least 60 out of 100 in the exam. This reduced the number of applicants down to 250. Finally, the university scheduled interviews with these 250 appli- cants and selected the 200 most impressive students. The university then sent acceptance letters to these 200 successful candidates. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 10 / 27  Some Key Concepts Case 1: Understanding Rationing Devices 1. Identify the rationing devices used by the university admissions committee. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 11 / 27  Some Key Concepts Case 1: Exploring Opportunity Costs Case 1: Admissions at All Directions University (continued) The admissions committee was curious about why a 100 applicants did not show up for the admissions exams. Thus they had their team of interns call up these no-shows. Of the 70 that answered their phones, 65% said that they had al- ready already been admitted into ’Best National University’, the moist prestigious public university in the country. They did clarify that had they not gotten into Best National University, their second choice would have been ADU. About 30% of them said that they had been stuck in traffic, while the remaining 5% said that they had missed the exam because they overslept. They asked if they could be given a second chance, but the admissions committee refused since it was against university policy to have make-up admissions exam. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 12 / 27  Some Key Concepts Case 1: Exploring Opportunity Costs (contd.) 1. What is the opportunity cost for those students who chose to go to Best National University? Justify (give reason for) your answer. 2. What is the opportunity cost for those students who overslept? Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 13 / 27  Some Key Concepts Opportunity Cost - Practice Questions You have one hour to relax - you can spend that time playing games on your phone, watching Netflix, working out or face-timing your friends. ▶ Say you choose to watch Netflix. ▶ So your opportunity cost of watching Netflix for an hour is because. Say you are stuck in traffic - while stuck in jam, you can sleep, scroll on facebook, livestream complaining about Dhaka traffic. ▶ So the opportunity cost of sleeping while stuck in traffic is because. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 14 / 27  Some Key Concepts Zero Price vs Zero Cost Say, your friend has an extra ticket to a cricket match and gives it to you. You had to pay nothing for the ticket. So, does zero price mean zero cost? ▶ NO - because if you go to the concert, you give up studying for tomorrow’s quiz or you give up hanging out with your friends. So there is always an opportunity cost! Zero price DOES NOT mean zero cost. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 15 / 27  Some Key Concepts Decision Making and Opportunity Cost Teacher notices that Russel is always late for class but he is early on exam days. Why? Non-exam days: what does he give up if he is late for class? ▶ A few minutes of lecture - but maybe he can always get the notes from a friend. ▶ Marks for attendance - but that’s a small percentage of his total grade. ▶ So, opportunity cost is LOW. But, what does he forgo if he is late on the day of the exam? ▶ Good grade (may go from an A minus to a B). ▶ Teacher won’t give him extra time, which means his exam may be incomplete ⇒ grade will be affected. ▶ So, opportunity cost is HIGH. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 16 / 27  Some Key Concepts Decision Making and Opportunity Cost Rule of Thumb: As opportunity cost INCREASES, behaviour changes. So, what could his teacher do to ensure students come to class on time? Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 17 / 27  Decision Making at the Margin Deciding at the Margin Decision making - happens at the margin. People do not think “Should I have 3 burgers vs 0 burgers” ⇒ Instead they ask themselves “Should I have a 3rd burger? ” People do not choose between studying vs. not studying ⇒ Instead they ask themselves “I have already studied for 1 hour - should I study for the a 2nd hour? ” Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 18 / 27  Decision Making at the Margin Deciding at the Margin: MB vs MC Essentially, people consider additional or MARGINAL cost/benefit. People ask themselves 2 main questions: ▶ How much does my joy/happiness/utility ↑ from an additional burger? (i.e. Marginal Benefit) ▶ How much does my cost (dollar cost/opportunity cost) ↑ from an additional burger? (i.e. Marginal Cost) Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 19 / 27  Decision Making at the Margin Deciding at the Margin: MB vs MC Marginal Benefit (MB) ▶ Additional benefits - the benefit from consuming an additional unit of a good or undertaking one more unit of an activity. Marginal Cost (MC) ▶ Additional costs - the costs from consuming an additional unit of a good or undertaking one more unit of an activity. Net Benefit (NB) = MB - MC Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 20 / 27  Decision Making at the Margin Deciding at the Margin: Graphical Analysis Equilibrium or optimal occurs where MB = MC - Why? When MB > MC ⇒ continue consuming more - WHY? ▶ NB still positive - if consume an additional unit, gain more than lose out - so continue consuming. When MC > MB ⇒ do not consume - Why? ▶ NB is negative - if consume an additional unit, end up losing out more than you are gaining - thus pull back! Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 21 / 27  Decision Making at the Margin Thinking at the Margin: Library Fines Case 2: Library Fines Let’s say your course instructor assigns you a lot of extra reading from a very rare textbook. You cannot find any electronic versions on-line and the book is not available in the university book store. Thus you go to your university library. You borrow the required book and can keep it for 2 weeks. The librarian tells you that at the end of 2 weeks, if you do not return the book you will incur a fine of BDT 5 per day. You thank her for informing you about the late fee policy and take the books home. Two weeks go by and it is time for you to return the books. Your professor however wants you to submit a report using those textbooks. You thus decide to incur the late fee and keep the books for a few extra days in order to finish your report. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 22 / 27  Decision Making at the Margin Thinking at the Margin: Library Fines (contd) 1. Let’s say that on the first day past deadline, you are very productive and manage to write 11 pages of the report. On the 2nd day after the deadline has passed, your productivity falls a little and you write 7 more pages using the borrowed book. You realise that, if this trend continues, your productivity will be a little less for each extra day that passes. Draw the Marginal Benefit curve from keeping the book past the 2 week deadline - clearly label your axes. 2. Now draw the Marginal Cost curve using the information on late fees. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 23 / 27  Decision Making at the Margin Thinking at the Margin: Library Fines (contd) 3. Let’s say that the optimal number of days you will keep the book, after the deadline has passed is 5 days. Show this in the graph drawn above. Explain why your optimum occurs at 5 days. 4. Using the graph you have drawn, explain why you will NOT RETURN the books 4 days after the 2 week deadline. 5. Using the graph you have drawn, explain why you will NOT KEEP the books for a 6th day, after the deadline has passed. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 24 / 27  Decision Making at the Margin Unintended Effects Mandatory Seatbelts in cars. ▶ Intended Effect - Reduce fatalities when there are car accidents. ▶ Unintended Effect - People drive faster/more recklessly, because they feel safer. Obamacare - Any company with 29 employees or more, employer must provide health insurance for employees. ▶ Intended Effect - more people can access affordable health care. ▶ Unintended Effect - companies with > 29 employees started laying off people. Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 25 / 27  Decision Making at the Margin Some Additional Terms: Positive vs Normative Economics Positive vs Normative Economics ▶ Positive Economics - facts - “what is” ♦ “More than 58,000 workers in U.S.based tech companies have been laid off in mass job cuts so” ▶ Normative Economics - value judgement - “what should be” ♦ “Tech companies should not have fired long term employees by simply cutting their access to company online portals!” Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 26 / 27  Decision Making at the Margin Some Additional Terms Microeconomics vs. Macroeconomics ▶ Microeconomics - deals with human behaviour and choices for small units (e.g. a individual, a firm, a market). ♦ What happens to the price of chips when supply of potatoes increases? ♦ How does a tax cut affect the production of cigarettes? ♦ How does parents respond when tuition fees are increased? ▶ Macroeconomics - deals with human behaviour and choices for the whole economy. ♦ How is the national price level affected due to the Ukraine war? ♦ How does the new tax policy affect the total output of the economy? Dr. Saima Khan (NSU) ECO 101 - Introduction to Microeconomics 27 / 27