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Chapter 1 Introduction

Chapter 1 Introduction. I’ve often wondered what goes into a hot dog. Now I know and I wish I didn’t. William Zinsser. Chapter 1 Outline. 1.1 Microeconomics: The Allocation of Scarce Resources 1.2 Models 1.3 Uses of Microeconomic Models.

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Chapter 1 Introduction

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  1. Chapter 1Introduction I’ve often wondered what goes into a hot dog. Now I know and I wish I didn’t. William Zinsser

  2. Chapter 1 Outline 1.1 Microeconomics: The Allocation of Scarce Resources 1.2 Models 1.3 Uses of Microeconomic Models

  3. 1.1 Microeconomics: The Allocation of Scarce Resources • Scarcity implies trade-offs • Resources (workers, raw materials, capital, and energy) are available in limited supply. • Which goods and services should be produced? • How should we produce those goods and services? • Who gets to consume those goods and services? • Decision-makers • Individuals (consumers) • Firms • Government

  4. 1.1 Microeconomics: The Allocation of Scarce Resources • Prices determine resource allocation • Which goods? How to produce? Who gets them? • Prices answer these important questions by influencing decision-makers. • Markets • A market is where interactions between consumers, firms, and the government occur. • Prices of goods and services are determined in a market.

  5. 1.2 Microeconomic Models • A model is a description of the relationship between two or more economic variables. • Understanding this relationship allows economists to predict how a change in one variable will affect another variable. • Economic models: • have assumptions that simplify things relative to the real world • make theoretical predictions that we can test empirically • involve maximizing something (e.g. consumer satisfaction, firm profits) subject to resource constraints • are used to make positiverather than normativestatements • The truth of a positive statement can be tested. • A normative statement contains a value judgment that can’t be tested.

  6. 1.3 Uses of Microeconomic Models • Predicting individual decisions • How does inflation affect the decision whether to rent an apartment? (Ch. 5) • Does it pay financially to go to college? (Ch. 15) • Should a homeowner purchase insurance? (Ch. 16) • Should you pay a lawyer by the hour or as a percentage of winnings? (Ch. 19) • Predicting firm decisions • Should a movie theater charge lower prices for matinees? (Ch. 12) • Should Coca-Cola advertise more if Pepsi does? (Ch. 14) • How does a mining company’s extraction decision depend on interest rates? (Ch. 15) • Predicting government decisions • What is the impact of a new tax on tax revenues raised? (Ch. 2) • Would San Francisco earn more money by raising the price of cable car rides? (Ch. 11) • How can pollution taxes reduce global warming? (Ch. 17)

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