Lecture 1: Introduction to Microeconomics PDF

MICROECONOMICS (ECN60104) Module Leader: Dr. Marina Tutors: Dr. Marina, Dr. Yap Wai Weng, & Dr. Sanggetha Module Structure & Assessments COMPULSORY LECTURE LECTURE – 1 INDEPENDEN ACTIVITY - 1 H...

MICROECONOMICS (ECN60104) Module Leader: Dr. Marina Tutors: Dr. Marina, Dr. Yap Wai Weng, & Dr. Sanggetha Module Structure & Assessments COMPULSORY LECTURE LECTURE – 1 INDEPENDEN ACTIVITY - 1 HOUR T STUDY HOUR MID-TERM INDIVIDUAL FINAL EXAM – TEST – 15% ASSIGNMENT – 50% 35% Main Text (Either Edition) Economics 8th edition, Global Edition LECTURE 1 – CHAPTER 1 INTRODUCTION TO ECONOMICS PROBLEM Chapter Outline (Student To Go Through) 1.1 Three Key Economic Ideas 1.2 The Economic Problem That Every Society Must Solve 1.3 Economic Models 1.4 Microeconomics and Macroeconomics Copyright © 2023 Pearson Education, Ltd. All Rights Reserved  What is economics all about? The Basic Economic Problem Wants - Things that we do not really need but we would like to have…. Factors of Production Factors of production, or productive inputs, are the resources we use to produce goods and services. Land Land includes all natural physical resources – e.g. fertile farmland, water, mineral, oil and gas deposits, climatic conditions or the harnessing of wind power and solar power and other forms of renewable and non-renewable resources. Labor The human effort, physical and mental, used by workers in the production of goods and services. Capital i) Physical capital - All the machines, buildings, equipment, roads and other objects made by human beings to produce goods and services. ii) Human capital - the knowledge and skills acquired by a worker through education and experience. Entrepreneurship The effort to coordinate the production and sale of goods and services. Entrepreneurs take risk and commit time and money to a business without any guarantee of profit.  Choosing What We Want Due to the problem of scarcity: Choices are necessary as people try to attain their goals…...  Therefore, Economics is the study of the choices that people make to attain their goals, given their scarce resources. 1.1 Three Key Economic Ideas Economic agents interact with one another in markets. Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.  1.1 Three Key Economic Ideas In analyzing markets, we generally assume: 1. People are rational - Use all information and, weigh benefits and costs of actions and try to make the best decision possible. Example: Apple doesn’t randomly choose the price of its smartwatches; it chooses the price(s) that it thinks will be most profitable. 1.1 Three Key Economic Ideas 2. People respond to economic incentives As incentives change, so do the actions that people will take. Example: In many states, convicted felons are required to submit DNA samples. DNA from new crimes is checked against the databased of submitted DNA, so repeat offenders are more likely to be caught. The introduction of this process reduced repeat convictions by serious violent offenders by 17%. Even criminals respond to economic 1.1 Three Key Economic Ideas 3. Optimal decisions are made at the margin While some decisions are all-or-nothing, most decisions involve doing a little more or a little less of something. Example: Should you watch an extra hour of TV, or study instead? A marginal decision – For economists, decisions like this compare the marginal cost and marginal benefit (MC and MB): the additional cost or benefit associated with a small amount extra of some action.  1.2 The Economic Problem That Every Society Must Solve THE ECONOMIC PROBLEM CAN ALSO BE EXPRESSED IN THE FORM OF THREE FUNDAMENTAL ECONOMICS QUESTIONS.  1. What goods and services will be produced? Individuals, firms, and governments must decide on the goods and services that should be produced. An increase in the production of one good requires the reduction in the production of some other good. This is a trade-off and the cost of this trade-off is known as the opportunity cost - the highest- valued alternative given up in order to engage in some activity due to scarcity of productive resources. Example: the opportunity cost of increased funding for space exploration might be giving up the opportunity to fund cancer research.  A firm might have several different methods for producing its goods and services. Example #1: A music producer can make a song sound good by Hiring a great singer, and using 2. How will standard production techniques; Hiring a mediocre singer and using the goods Auto-Tune to correct the inaccuracies. be produced? Example #2: As the cost of manufacturing labor changes, a firm might respond by Changing its production technique to one that employs more machines and fewer workers; Moving its factory to a location with cheaper labor  Distribution of goods - The way we are 3. Who will most familiar with in receive the goods and the United States is services that people with produced? higher incomes obtain more goods and services.  Economic systems are the basic arrangements made by societies to solve the economic problem (what, how & for Economic whom). They include: Systems Centrally-planned (command) economy Free market (capitalism or laissez- faire) economy Mixed economy  Through the government ownership of state enterprises, the government either directly or indirectly, determines what to produce, the level of output to produce, the method of which it is produced and to whom it is produced for. Command Economy/ Centrally The government owns most of the business firms. Planned Economy Examples: Soviet Union (until 1990s), China (until 1970s), Old Egypt, North Korea, Cuba and Venezuela.  Free/Market Economy Free economic freedom. The economic questions are answered without the help of a central Individuals and firms government plan or Firms owned by the pursue their own self directives. The private sector. interests. market forces of demand and supply coordinates economic activities (e.g., price determination). Examples: United States, Government is only UK, Canada, Australia, responsible for the Western Europe (e.g. provision of public Ireland, Germany), goods and other Singapore, Ireland and facilities. Hong Kong  Mixed Economy In reality, there are no pure The individual planned/comm All systems enterprise exists, and economies are in some and government or pure free sense mixed. involves in the market decision making economies in as well. the world. The basic questions Government are jointly involvement in Examples: answered by the inequality issues, Malaysia, United market forces and consumer Kingdom, Japan the government sovereignty and labor and most of the (economic protection through countries in the planning, price regulation over world. system). private sector.  Efficiency of Economies & Source Market economies tend to be more efficient than centrally-planned economies. Market economies promote: Productive efficiency, where goods or services are produced at the lowest possible cost - due to competition; and Allocative efficiency, where production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. Allocative efficiency arises due to voluntary exchange. Voluntary exchange: A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction. Transactions continue until no further improvement can take place. Caveats about Market Economies Markets may not result in fully efficient outcomes. For example: People might not immediately do things in the most efficient way Governments might interfere with market outcomes Market outcomes might ignore the desires of people who are not involved in transactions – ex: pollution Economically efficient outcomes may not be the most desirable. When markets result in high inequality; some people prefer more equity. Market Economies and Equity Equity: The fair distribution of economic benefits An important trade-off for a government is that between efficiency and equity. Example: If we tax income, people might work less or open fewer businesses; but those tax receipts can fund programs that aid the poor.  1.3 Economic Models Economists study choices using economic models, simplified versions of reality used to analyze real- world economic applications. TESTABILI ECONOMI BEHAVIOR TY REVISE C AL (HYPOTH THE VARIABLE ASSUMPTI ESIS) - MODEL S ONS AND CAN BE IF IT (MEASUR SIMPLIFICA VERIFIED FAILS ABLE TIONS OR AND DATA) – DISPROV RETAIN PRICE, In analysis: EN INCOME, ETC. Positive analysis: analysis concerned with statement of “facts” and “what is” Normative analysis: analysis concerned with statement of “opinion” or “judgement” and “what ought to be” Economics as a Social Science (Student Reading) Social sciences study the actions of individuals; economics is a social science, like psychology, political science, and sociology. Compared with other social sciences, economics puts more emphasis on how individuals’ actions and decisions affect outcomes like prices, and how changes in conditions and policies affect those outcomes. Economics considers the actions of individuals in every context, not just business. Government policymakers have increasingly relied on economic analysis. Copyright © 2023 Pearson Education, Ltd. All Rights Reserved Apply the Concept: What Can Economics Contribute to the Debate over Tariffs? (Student Reading) Governments can impose tariffs (taxes on imports) to raise revenue or discourage imports. Economic theory can identify the likely winners and losers from a particular tariff. Economic analysis can use models and data to estimate the dollar amounts gained by the winners and lost by the losers. Typically, the losses outweigh the gains, so economists generally discourage tariffs. But policymakers may place higher value on the well- being of some groups—aCopyright normative judgment. © 2023 Pearson Education, Ltd. All Rights Reserved  1.4 Microeconomics and Macroeconomics Microeconomics - the study of how households and firms make choices and interact in markets, as well as how the government attempts to influence their choices. Macroeconomics - the study of the economy (the aggregate behavior of households, firms and government), including topics such as inflation, unemployment, and economic growth. Table 1.1 Issues in Microeconomics and Macroeconomics (Student Reading) Examples of Microeconomic Issues Examples of Macroeconomic Issues How consumers react to changes in Why economies experience periods of product prices recession and increasing unemployment How firms decide what prices to Why, over the long run, some economies charge for the products they sell have grown much faster than others Which government policy would most What determines the inflation rate efficiently reduce opioid addiction What determines the value of the U.S. dollar The costs and benefits of the federal in exchange for other currencies government’s approving the sale of a new prescription drug Whether government intervention can reduce the severity of recessions The most efficient way to reduce air pollution Copyright © 2023 Pearson Education, Ltd. All Rights Reserved 1.6 A Preview of Important Economic Terms (Student Reading) Define important economic terms. Like all fields of study, economics uses terms or jargon with specific, precise meanings. Sometimes these terms will be used in ways that differ even from closely related disciplines. Examples: Technology: the processes a firm uses to produce goods and services Capital: manufactured goods that are used to produce other goods and services Pay close attention to terms defined in class and in the textbook! Copyright © 2023 Pearson Education, Ltd. All Rights Reserved