Microeconomics Notes PDF

Lecture 1: Language of Economics- What is economics? Economics- study of choices that individuals make given the presence of scarcity. Scarcity occurs when there are limited resources but unlimited wants. Who’s fault we make choices? Scarcity What is scarcity? limited resources but unlimited want...

Lecture 1: Language of Economics- What is economics? Economics- study of choices that individuals make given the presence of scarcity. Scarcity occurs when there are limited resources but unlimited wants. Who’s fault we make choices? Scarcity What is scarcity? limited resources but unlimited wants. What resources? Types of Resources Resources are used to make economic goods: - Land- air (like clean air vs smog), land, house on land? oil - Nonhuman animal resources- chickens, wildlife, - Labor- humans - Capital- manmade resource, computer, physical monitor - Technology- software and data and processes, AI - skills- math skills, etc. Scarcity vs. Poverty o Everyone faces scarcity because nothing is unlimited. o Objective vs. Subjective o Poverty is not the reason we make choices. Scarcity is the reason we make choices. If we did not have limited resources, we would not have poverty issues to begin with. Its scarcities fault we don’t have unlimited resources to go around o Scarcity is what forces us to make choices. o Can poverty be eliminated? HW: Schedule exams and do homework 2. Lecture 2: Positive statement- a statement that can be tested, proven or disproven. (ex. Death toll rises to 25 across Tennessee due to weather). How to test- make sure we know what winter related means. Call source of the data and count things up. When we’re dealing with numbers, they are normally testable. If we count 25, we prove it true. We can also test percentages and prove increase/decrease. Things we can’t prove a lot, a little, smart dumb, -ly added to a word) Normative statement- a statement of opinion cannot be proven or disproven (key words: ought, should, good, bad) ex. A tornado wipes out the Readyville community. (wiped out is subjective, asking clarify questions = normative) Positive economics statement allows us to student the facts about how the economy works. You take positive research and create normative economics. Normative economics used to identify problems and prescribe solutions. Give your opinion and defend it with a fact. (minimum 2 sentences for homework) if you add the word very to a positive statement, you make it normative. Nine Guideposts to Economics Thinking: 1. Rational 2. Subjective 3. Incentives 4. Marginal 5. Tradeoffs 6. Information Costs 7. Secondary Effects 8. Theory 9. Market Forces 1. Rational Decision-makers choose purposefully. (We are rational decision-makers.) a. We weigh costs and benefits. b. We economize- getting the maximum benefit at the minimum cost. Guy jumping in pool. Costs: wet clothes, missing the pool, dignity. Benefits: Fun (thrill), attention. Bing Bang Theory-Rationality If costs outweigh benefits, and you do it anyways, it was an irrational choice. 2. Costs and Benefits are Subjective. Costs examples for shoes: price, comfort, practicality, judgment, risk of injury Benefits examples: stylish, social status, brings you joy, attention. If decisions are rational, we never include sunk cost. (cost that’s been paid that you can’t get back) ex. Tuition is a sunk cost, so it shouldn’t be a part of your daily decision to come to class. Every cost benefit analysis avoids the sunk cost. 3. Incentives Matter- people respond in predictable ways. Lecture 3: 1/31/25 First Quiz- Quizzes are open notes, 15 minutes. 4. Individuals make decisions at the Margin. Economical thinking is marginal thinking. (thinking of one extra unit at a time, one step at a time, looking at the total packages like benefits and costs) EXTRA to EXTRA NOT ADDITIONAL The economic decision rule- if the marginal (incremental) benefit of an action exceeds the marginal (increment) cost, then do it. o If MC>MB, then do NOT do it. We do things to the point where MB =MC 5. Scare resources are costly, so tradeoffs must be made- Opportunity costs. Highest valued benefit that must be sacrificed as the result of choosing an alternative. o Second best choice that you didn’t pick. o Not the sum of all forgone activities o Subjective, different per person If you mow your own lawn, you can do it in 2 hours. You could’ve gone to work and paid a lawncare service to do it. – mowers should mow, but she must pay them. Her cost isn’t 0 if she does it herself because she could’ve worked. 6. Acquisition of information is costly. a. Making choices with imperfect information b. Impact of the internet 7. Anticipate Secondary Effects a. (unintended consequences) b. Seat Belt law- when people felt safer, they drove more recklessly, and pedestrians died. 8. The test of a theory is its ability to predict Economic Theory- generalizations about the working of an abstract economy. a. Simplify the world and pick out pieces that model the concept. If you add too many variables, you lose predicative power (so you don’t add stuff you don’t need). b. Economic Models- we can use simple abstract models to study larger, more complex concepts. c. Models of production d. Use for policy analysis. 9. 3 Market Forces that Influence Economic Outcomes- Adam Smith- father of economics who called himself a philosopher- coined the phrase the invisible hand- it’s like a chess board- farmer talk, they do what’s best for society without realizing it. a. Invisible hand is the price mechanism. (Pencil video of all people working together to make it. Should I sell these erasers? Yes, I’ll make money. Hence each person involved with making it are persuaded by price) It’s worth it to me because of the price = invisible hand. b. The Invisible Handshake (made up)- Social and historical forces (culture norms)- cultures shaking hands. If you’re dealing with society, social norms, tradition, history when making decision then you are doing a social and historical forces. Ex. People are looked down upon for buying escorts so it’s invisible handshake. c. The invisible foot (political and legal forces) i. Selling babies/selling alcohol to underage drinkers Lecture 4: Talks about homework- Honeymoon package. 5 Pitfalls to avoid in economic thinking. 1. Violation of ceteris paribus condition can lead one to draw a wrong conclusion. a. “Holding all else constant.” b. Ex. If you hold all things constant and change one thing, you know what causes the error. If you change two things, you can’t know what was causing it. 2. Good intentions do not guarantee desirable outcomes. a. Ex. Child Proof caps have negative unintended consequences. 3. Association is not Causation. Less Homework, Higher schools * they aren’t the same. Happening the same time but not causing each other. a. You are doing two things at once. 4. Avoid the fallacy of composition. a. What is true for the individual will also be true for the whole. b. Incorrect. c. You have assumed that something is good for one person it’ll be good for everyone. 5. There’s no such thing as a free lunch. a. Free means costless b. Merriam Webster defines “free” as “not costing anything.” Price is not the same thing of cost. c. Free does not mean that the price is $0, then it still has cost(s). d. Nothing is costless; therefore, nothing is free. e. What is one cost to a decision that will ALWAYS exist? ____________ Quiz 1 _____________ ^^^^ Math and Graph Review o Variables and Relationships o Symbols to represent quantities. o Xs and Ys o Y = f(x) function o Y: dependent variable (dependent on what X does) o X: independent variables (stand-alone) o Ex. Y=GPA, X=# of hours spend studying per week. If they are going in the same direction, we call it a positive mathematical relationship If the go in opposite directions we call it a negative or inverse mathematical relationship. Lecture 5: Graphing: Let Y = Web Site Revenue Let X = # of web site hits $100 start up investment. 10 cents per “hit.” Y = f(x) = 100 +.1x Downward slope= Inverse relationship. Y = a +bx (linear equation, b is slope. A is y int.) As x increases by 1 unit, y increases my m units. AS THE number of web site hits increases by 1 hit, revenue increases by.1 dollars (or ten cents) (x1, y1) = (0, 100) (x2, y2) (10,101) M = delta y / delta x These are the Bernadette economics test scores. Average= add all exam scores and divide by the quantity. Median = middle value- line from least to greatest Lecture continued: Production Possibilities Frontier, Trade, and Growth What is a market? Anywhere that trading occurs. Ticket Trading (Lecture 6) o Market setting facilitates specialization. 1. Trade is not a ‘zero sum game”- when individuals engage in a voluntary exchange, both parties are made better off. 2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by society’s resources. 3. Transaction Costs can inhibit trade. (cutting out the middleman is not always a good idea) a. Time, effort, and other resources needed to search out, negotiate, and complete an exchange. b. Ex. Standing in line is a transaction cost before you make the trade. c. Middlemen usually reduce transaction cost because they can usually be very high, 4. The Middleman reduces costs. 5. As trade restrictions are lifted, more value is created from trade (because they originally restrict trade so less value) Ex. Tariff Production Possibility Frontiers- boundary or curve PPF A graph that shows the possible combinations of two goods (products) or other outcomes (eg. Grades) that can be produced given a fixed level of technology and resources (including time) being used efficiently at a fixed point in time. All the possible combinations of production. Point f (little bit of shoes and little bit of video games) means its inefficient- unemployment of resources. You can’t get to g. because you don’t have resources left (unattainable). The slope of the PPF measures opportunity cost. Infinite # of outcomes. The slope at point A is not the same between points. Means changing opportunity cost at every point, Difference in PPF graphs: Linear- constant slope Curved PPF- changing slope PPFs and Opportunity Costs o The slope of a PPF changes because of the law of diminishing marginal returns o Do you get as much benefit out of the 10th hour of studying as you do out of the first (in any given day? o Does the second bowl of ice cream taste as good as the first? How about the fifth bowl? o Production (firms) face challenges (like what?) Guns and butter graph describes the tradeoff governments face in spending on national defense or on domestic programs. The law of increasing marginal opportunity cost^^- as economy produces more of a good, the opportunity cost of an additional unit, expressed in terms of other goods sacrificed will increase. o Exists because most of our resources are not equally efficient for producing al outputs. o Comparative advantage of a resource- if you have the lowest opportunity cost of producing something. ECONOMISTS SAY WE should use this. o Law of comparative advantage- They should specialize in their product and trade in everything else. Gain in what they produce cheap (low opp. cost) and exchange what they can't. o Absolute advantage o If you can produce more of a goof with the same amount of resources as someone else. Opportunity cost for one coconut for skipper and one banana for Skipper (0,3), (9,0) X y. x. y 0-3 9-0 -3/9 Slope =-1/3 As bananas incease by 1 ubit, coconuts decrease by 1/3 units. Opp cost of 1 banana : 1/3 (we give up 1/3 banana) 1/3 (*3)= 3 bananas = 1 Coconut, so opp cost of 1 Coconut = 1 banana. By law we have to choose whoever has the lowest cost, so for Skipper it’s a 1/3 And for Gilligan its 2. Skipper’s is lower. So, skipper should specialize in banana production. Coconuts is ½ banana for Gilligan and 3Bananas for skipper. Gilligan has lowest opp cost in producing bananas. We need to be able to do the math. Without math, just compare steepest- flattest is the one who has the comparative advantage. Gilligan’s is flattest towards to coconuts axis and skippers is closest towards bananas. The flatter slope of the PPF of the lawn service indicates a lower opportunity cost for mowing. Through specialization and trade you can reach an unattainable point =. Gains from trade Lecture 7 Michael Phelps and lawn care service image of graph. Q: What is a market? A: Anywhere that trade occurs. Q: What is an economy? A: It’s a network of markets Shifting the PPF- What restricts an economy from producing more of everything? o A lack of resources (causes us to make these tradeoffs) o Over time, it’s possible for a country to shift it’s PPF outward (or inward) o We call this economic growth. (we can’t count ALL changes, so we categorize them) 4 Factors that can shift the PPF outwards: 1) Advancements in technology can expand the economy’s production possibilities. a. Invention: creating new products (e.g., electricity, computers, etc.) b. Innovation: practical and effective adoption of new techniques c. Entrepreneurs- introduce new products to satisfy consumers at a lower cost. Shifts in the PPF o Positive Shocks (shifts outwards) o Technological Breakthrough o Discovery of Natural Resources 2) An improvement in the rules under which the economy functions can also increase output. a. Legal systems affect people’s ability to cooperate with teach other and produce goods. b. One important innovation has been patents.  c. What about rules that add more red tape (additional cost to get to production = shift inward on graph. Shifts are called… Negative Shocks (shifts inwards- called economic contraction) o Earthquake o Political Upheaval- ex. Russian attacks Ukraine. Ukraine cannot produce as much wheat as they used to because their focus is on defense, not production. Uneven Shocks- see graph for information. o Drought- if country experiences a drought, they cannot produce much lettuce. It does not affect computers so there’s a decrease of x values by not y values. o What is happening to the cost of growing lettuce? 3) Labor Leisure Tradeoff- By working harder and giving up current leisure, we could shift the PPF outward. a. Labor time- any time you spend earning a wage. b. Leisure time- anything that’s not labor time. c. U.S. workers work much more than those in France and other European countries. What if everyone just works less? Labor x time graph- PPF Shifts inward. 4) An increase in the economy’s resource base would expand our ability to produce goods and services. a. Ex. Investment- gives us better tools and skills, increasing our ability to produce more goods and services. o This can be investment in numerous areas (including fertility- i.e., population growth). Graph initially shifts inward while you set resources aside. Later you invest what you’ve grown, and your graph shifts further than with what you started. o Fertility explained- if country invests in child’s health now, they have more labor when they grow to adulthood. They aren’t getting value in the babies today, but later they will. Budget constraint- mathematical graph of maximizing budget. It’s downward sloping so it’s an inverse relationship (on homework). Lecture Private Property Rights and Economic Organizations The importance of property rights - Property Rights- the right to use, control and obtain the benefits from a good or service. - Private Property Rights- the rights to an exclusive use of the property. Legal protection against the invasion from others who would seek to use or abuse the property without the owner’s permission. The right to transfer, sell, exchange, or mortgage the property. o Incentive Effects of Private Property Rights (crucial for economic progress)  ▪ Private owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring wishes of others. ▪ Private owners have a strong incentive to care for and properly manage what they own. Ex) Cars need oil so if your car is leaking you want to fix that problem, so you don’t have to pay extra charges later. ▪ ▪ Private owners have an incentive to conserve for the future, particularly if the property is expected to increase in value. (ex. Saving money for future. Ex. Fishing, throw back big fish so they breed more big fish) ▪ Property owners have an incentive to lower the chance that their property will cause damage to the property of others. Exam practice T/F scarcity can be eliminated through continued improvements in technology. False. T/F the opportunity cost of attending college is the same for all students in this class. False T/F Cuba now has a pure market economy. False. T/F Elephant herds are more likely to thrive and grow in African countries where hunting is illegal, and elephants roam free than in countries where hunting is legal, and tribes have private property rights to elephant herds. False. T/F Creating jobs to reduce the unemployment rate will NOT shift the PPF to the right, it will only move the country from a point below the PPF to a point closer to the PPF or to a point on the PPF. True An economic model is a _______. Simplified representation of an economic environment. Suppose you’ve purchased a non-refundable ticket to the Bahamas for Thanksgiving break. Your friend tells you that she is getting married asked you to be in the wedding. You should not include the price of your ticket in your analysis. True. Sunk Cost. The factory building that Toyota uses to produce cars is classified as which type of resources? Capital Normative statement? The university should increase tuition to help fund athletic programs. In this figure the slope of the line is _________. 5 which means for every 1 hour increase in the # of hours worked per week, Krystal runs a nail salon. The table illustrates her marginal costs of staying open each hour. Suppose that Krystal’s marginal benefit of staying open per hour is $30. How many hours should Krystal stay open? 4 hours. You own the movie Pirates on DVD. The opportunity cost of watching this DVD for the fifth time is __________is the value of the alternative use pf the time you spend watching the DVD. Which of the following is an appropriate role of government in a pure market economy. Enforce property rights. Under a system of private property, could a 60-year-old owner benefit by planting an caring for a plant that will not be ready to cut for 50 years? Yes the farmer will benefit by investing in his poeprty. Of this country is producing 400 tons of agricultir products per year, what is the mac anount og manufactures oriducts the can produce per year? 500 tons