Principles of Microeconomics 3e PDF

Principles of Microeconomics 3e Chapter 1 WELCOME TO ECONOMICS! PowerPoint Image Slideshow Ch.1 OUTLINE 1.1: What Is Economics, and Why Is It Important? 1.2: Microeconomics and Macroeconomics 1.3: How Economists Use Theories and Models to Understand Economic Is...

Principles of Microeconomics 3e Chapter 1 WELCOME TO ECONOMICS! PowerPoint Image Slideshow Ch.1 OUTLINE 1.1: What Is Economics, and Why Is It Important? 1.2: Microeconomics and Macroeconomics 1.3: How Economists Use Theories and Models to Understand Economic Issues 1.4: How Economies Can Be Organized: An Overview of Economic Systems 1.1 What Is Economics, and Why Is It Important? Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. Scarcity means that human wants for goods, services and resources exceed what is available. Resources include natural, labour, capital resources (including human capital but NOT financial capital) and entrepreneurial ability. Economics in the Social Media Age Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major forces on the information superhighway. (Credit: modification of "Social Media Mixed Icons - Banner" by Blogtrepreneur/Flickr, CC BY 2.0)) Scarcity Homeless people are a stark reminder that scarcity of resources is real. (Credit: “daveynin”/Flickr Creative Commons) Comprehensive Study of Economics Adam Smith introduced the idea of dividing labour into discrete tasks, in his famous 1776 book, titled The Wealth of Nations. (Credit: "Adam Smith" by Cadell and Davies (1811), John Horsburgh (1828), or R.C. Bell (1872)/Wikimedia Commons, Public Domain) The Division of and Specialization of Labor Division of labor - the way in which different workers divide required tasks to produce a good or service. Why the Division of Labour Increases Production Dividing and subdividing the tasks involved with producing a good or service, produces a greater quantity of output. Specialization - when workers or firms focus on particular tasks for which they are well-suited within the overall production process. Specialization allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. Netflix achieves economies of scale by having a large number of subscribers. Why Study Economics? Esther Duflo, Abhijit Banerjee (both from Massachusetts Institute of Technology), and Michael Kremer (University of Chicago) were awarded the Nobel Prize for groundbreaking work in which they established experimental methods to understand poverty and outcomes of initiatives to address it. (Credit: modification of work by U.S. Embassy Sweden/Wikimedia Commons, CC BY 2.0; Financial Times/Wikimedia Commons, CC BY 2.0; U.S. Embassy Sweden/Flickr Creative Commons, CC BY 2.0) Why the Division of Labour Increases Production Questions: 1. A consultant works for $200 per hour. She likes to eat vegetables but is not very good at it. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables? 2. Give the three reasons that explain why the division of labour increases an economy’s level of production. 1.2 Microeconomics and Macroeconomics Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Macroeconomics is the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance. Classify the following topics as relating to microeconomics or macroeconomics 1. A family’s decision about how much income to save. 2. The impact of higher national saving on economic growth. 3. A firm’s decision about how many workers to hire. 4. The relationship between the inflation rate and changes in the quantity of money. 5. The effect of government regulations on auto emissions. Other Economic Terms Monetary policy - policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing. Determined by a nation’s central bank Fiscal policy - economic policies that involve government spending and taxes. Determined by a nation’s legislative body 1.3 How Economists Use Theories and Models to Understand Economic Issues One of the most influential economists in modern times was John Maynard Keynes. (Credit: “John Maynard Keynes” by IMF/Wikimedia Commons, Public Domain) Keynes thought that economics teaches you how to think, not what to think. Economic Theories and Models A theory is a simplified representation of how two or more variables interact with each other. A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying. Economists use models to test theories, but for this course we will use the terms model and theory interchangeably. Circular Flow Diagram The circular flow diagram shows how households and firms interact in the goods and services market, and in the labour market. The direction of the arrows shows that in the goods and services (product) market, households receive goods and services and pay firms for them. In the labour (factor) market, households provide labour and receive payment from firms through wages, salaries, and benefits. Circular Flow Diagram Question: Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw the flows of imports, exports, and the payments for each on your diagram. 1.4 How Economies Can Be Organized: An Overview of Economic Systems There are at least three ways that societies organize an economy: 1) Traditional economy - typically an agricultural economy where things are done the same as they have always been done. Oldest economic system Used in parts of Asia, Africa, and South America Occupations tend to stay in the family What you produce is what you consume Little economic progress or development An Overview of Economic Systems 2) Command economy - an economy where economic decisions are passed down from government authority and where the government owns the resources. Government decides what goods and services will be produced and what prices it will charge for them. The government decides what methods of production to use and sets wages for workers. The government provides many necessities like healthcare and education for free. An Overview of Economic Systems 3) Market economy - an economy where economic decisions are decentralized, private individual own resources, and businesses supply goods and services based on demand. Market - interaction between potential buyers and sellers; a combination of demand and supply. Real World Economies Most economies in the real world are mixed. They combine elements of command, traditional, and market systems. The Canadian economy is positioned toward the market-oriented end of the spectrum. Many countries in Europe and Latin America, while primarily market-oriented, have a greater degree of government involvement in economic decisions than the Canadian economy. China and Russia, while they have moved more in the direction of having a market-oriented system, remain closer to the command economy end of the spectrum. The Range of Economic Systems 22 Regulations: The Rules of the Game There is no such thing as an absolutely free market. Regulations always define the “rules of the game” in the economy. Economies that are primarily market-oriented have fewer regulations— ideally just enough to maintain an even playing field for participants. Heavily regulated economies often have underground/shadow economies/informal economies (or black markets), which are markets where the buyers and sellers make transactions without the government’s approval. Federal government announces new rules on airline passenger protection, compensation The Rise of Globalization Globalization - the trend in which buying and selling in markets have increasingly crossed national borders. Exports - the goods and services that a nation produces domestically and sells abroad. Imports - the goods and services that are produced abroad and then sold domestically. Gross domestic product (GDP) - measures the size of total production in an economy. The Global Economy Cargo ships are one mode of transportation for shipping goods in the global economy. (Credit: "Cargo Ship" by Raul Valdez/Flickr Creative Commons, CC BY 2.0) The Rise of Globalization Questions: 1. How do you think globalization might have affected the economy over the past decade? 2. Why would division of labour without trade not work? 3. Can you think of ways that globalization has helped you economically? Can you think of ways that it has not?