Microeconomics PDF

Microeconomics The reference of the course: "Principles of Microeconomics", Betsey Stevenson, Justin Wolfers. University of Michigan-USA, New York, MacMillan Learning. Introduction: Economics: is a social science which focuses on the human economic problem, which is a problem of making ch...

Microeconomics The reference of the course: "Principles of Microeconomics", Betsey Stevenson, Justin Wolfers. University of Michigan-USA, New York, MacMillan Learning. Introduction: Economics: is a social science which focuses on the human economic problem, which is a problem of making choices and decisions, due to the scarcity. Every decision is an economic decision, should you drive, walk or take the bus? Will you get a job, or go to grad school? We apply economic analysis to "the ordinary business of everyday life". Students are challenged to apply a decision-making from work derived from core principles to the countless (many) choices, they face each day so Part 1 is about the Foundations of Economics.  CH; 1 The core principles of Economics Chapter objective: Learn the four core principles that provide the foundation of all economic analysis and use them to analyze choices and make better decisions. 1.1 A Principled Approach to Economics: Understand economics as a way of thinking grounded in a set of broadly applicable principles that you'll find useful "in the ordinary business of life". 1.2 The Cost-Benefit principle: Cost and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only purse those whose benefits which are at least as large as their costs. 1.3 The opportunity cost principle: The opportunity cost principle is the true cost of something; it is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost rather than just the out-of-pocket financial costs. 1.4 The marginal principle: It is decisions about quantities which are best made incrementally. You should break how many decisions down into a series of smaller or marginal decisions. 1.5 The interdependence principle: Your best choice depends on your other choices, and the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change. There are four types of interdependence you'll need to think about: 1. Dependencies between each of your individual choices. 2. Dependencies between people or business in the same market. 3. Dependencies between markets. 4. Dependencies between or through time. 1.1 A principled Approach to Economics Learning objective: Understand economics as a way of thinking grounded in a set of broadly applicable principles that you'll find useful "in the ordinary business of life". Economic is not just about money nor is it about business or even government policy though it can be helpful for understanding each of these rather it is a way of thinking, and the economic approach can also help you understand politics, families, careers, and just about every aspect of your life. One famous definition of economics describes it as the study of people "in the ordinary life". A systematic framework for making decision In this chapter you'll learn the four core principles of economics and apply them focusing on microeconomics in which you will study individual decisions and their implications for specific markets. The four core principles provide a systematic framework for analyzing individual decisions we will see that whenever economists evaluate a decision;  We consider the costs and benefits of a choice (The cost-benefit principle).  Before making a choice, we consider the alternative, asking "or what?" (The opportunity cost principle).  We think at the margin always asking whether a bit more or a bit less of something would be an improvement (The marginal principle).  And we are particularly trying to understand how different decisions depend on each other (The interdependence principle). So for economists individual decisions choices are the foundation of all economic forces. Economic analysis always begins by focusing on individual decisions using the four core principles. 1.2 The Cost-Benefit Principle The objective: costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs. For example: you want to go to work here you have many choices, no metro rail station nearby, buses only come rarely, and you are too far from work to bike or walk. So you think of buying a car to get to work, because the only other alternative is costly, but before you head out car shopping, you finds yourself wondering is buying a car really my best choice? The cost-benefit principle says that costs and benefits are incentives that shape decision, this principle suggests that before you make any decision, you should;  Evaluate the full set of costs and benefits associated with that choice.  Pursue that choice only if the benefits are at least as large as the costs. You should buy a car only if it yields benefits that are at least as large as the cost, because the balance of costs and benefits define your incentive to buy the car, but this require quantifying both costs and benefits through converting each cost and benefit into its money equivalent. When you follow the cost –benefit principle, every decision you make will yield larger benefits than costs, the difference between the benefits you enjoy and the costs you incur (bear) is called your economic surplus.  Economic surplus is a measure of how much your decision has improved your well-being, making good decision is all about maximizing your economic surplus. If you choose to buy a car, you must estimate the true cost of ownership, which include the following items; cost of the car, gas costs, parking costs insurance and repairs. Suppose total annual costs ($5,550) also the benefits (savings from not taking an Uber = $5000). So the economic surplus = $5550 - $5000 = $550. Because the annual cost is larger than the benefit. 1.3 The opportunity cost principle It is the true cost of something is the next best alternative you must give up to get it; your decision should reflect this opportunity cost rather than just the out-of-pocket financial costs. Example: about study MBA to get better career prospects, she will earn around 10% more but there are cost of an MBA (tuition $60,000 per year, she will have to quit her job) So your decisions should reflect your opportunity cost (what you must give up to get it). The opportunity cost principle highlights the problem of scarcity, meaning that whenever you choose to do something, you are implicitly choosing not to do something else. The opportunity cost arises because of a fundamental economic problem scarcity, your resources are limited – that is, they are scarce. The production possibility frontier What the production possibility frontier is for? It maps out the different sets of output that are attainable with your scarce resources.it illustrate the trade-offs- that is the opportunity cost you confront when deciding how best to allocate scarce resources like your time, money, raw inputs, or production capacity. Production possibility frontier: shows the different sets of output that are attainable with your scarce resources, it is illustrating your alternative outputs. Example: you have 3 hours per night to devote to studying either economic (where each hour will boost your grade by 8 points) or psychology (where each hour boost your grade by 4 points) The production possibility frontier shows what you can produce with alternative allocations of your time. Improve your Eco. Grade 3 hours on eco and 0 hour on psych. Improve eco by 24 points and psych by 0 points. 24 2 hours on eco and 1 hour on psych. 20 Improve eco by 16 points and psych by 4 points. 16 12 1 hours on eco and 2 hour on psych. 8 Improve eco by 8 points and psych by 8 points. 4 0 Improve your Psych. 4 8 12 16 20 24 Grade So moving along your production possibility frontier reveals your opportunity cost, so you how 3 different situations; Eco. 1. It's a frontier Grade boost 24 20 16 Efficient uses of resources 12 8 Inefficient uses of 4 resources 0 4 8 12 16 20 24 Psych. Grade boost Eco. 2. it illustrate your Grade boost opportunity costs 24 20 The opportunity cost of raising psych by 16 4 more points is that you will earn 8 12 fewer points on eco. 8 4 0 4 8 12 16 20 24 Psych. Grade boost  3. Greater productivity pushes out the frontier Eco. Grade boost 36 24 Higher productivity pushes out your PPF 12 18 Psych. Grade boost 1.4 The marginal principle It means that decisions about quantities are been made incrementally, you should break "how many" decisions down into a series of smaller, or marginal decisions. Example: suppose a lady decided to open an Italian restaurant, she has already chosen a location, and the required cooking machines. Next she needs to decide how many workers to hire, the benefit of hiring a larger staff is that she will serve more meals leading to higher revenue, but this also mean higher costs, because more staff means a higher wages bill and selling more meals means buying more free produce, as with so many things, there is a trade-off so, the lady wonders just how many workers she should hire. The marginal principle says that whenever you face a decision about how many of something to choose (such as "how many workers should I hire"), it is always easier to break it into a series of smaller, marginal decisions (such as "should I hire one more worker?") The marginal principle suggests that you evaluate whether the extra benefit from hiring one more worker exceeds the extra cost of that extra worker. We call the extra benefit you get from one more worker the marginal benefit, and the extra cost of that worker is called the marginal cost. Applying the cost benefit principle to this marginal choice, you should hire one more worker only if the marginal benefit exceeds the marginal cost. If you follow this rule then hiring an additional worker will increase your economic surplus (which is the difference between the total benefit you enjoy and the total costs you incur). Now it is your turn to apply the rational rule to make decisions (thinking about the relevant marginal costs and marginal benefits in case of: a consumer, a producer or even as a worker or as an investor, an export company, as a job seeker or even as an employer. 1.5 The interdependence principle Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future, when any of these factors change; your best choice might change. There are four types of interdependencies you will need to think about; 1. Dependencies between each of your individual choices. 2. Dependencies between people or business in the same market. 3. Dependencies between markets. 4. Dependencies through time. Since you have limited resources, every choice you make affects the resources available for every other decision, this interdependence follows from the many different constraints you face, consider the following examples;  You have a budget constraint, due to limited income and so the amount of money available to spend on entertainment depends on the amount left after spending on necessities.  You have limited time, because there are only 24 hours in a day, and so the amount of time available to study economics depends on how much time you spend on studying psychology.  You have limited production capacity because you only have one factory, and so the number of production lines available to produce hybrid cars depends on how many are producing mini vans.  You have limited wealth to invest, and so the amount you invest in a new start up depends on how much you invest in stocks and bonds.