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Basics of Microeconomics: Concepts and Assumptions for Economic Analysis

Explore the fundamental principles of microeconomics, including pricing strategies, profit maximization, and rational decision-making. Learn about scarcity, opportunity cost, and how production possibility curves illustrate economic trade-offs.

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Basics of Microeconomics: Concepts and Assumptions for Economic Analysis

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  1. Basics of Course What is economics about? Micro economics.? • Current def: whatever economists study - not a very useful definition of a discipline. • Historical and more useful definition: allocation of scarce goods for competing ends. • In reality, it focuses mainly on how freemarkets, consisting of voluntary participants, operate. • It can also be used to analyze other non-market forms of production and distribution.

  2. What Types Of Questions Do Micro-economists Try To Answer? • What pricing strategies allow firms to maximize profits? • When should a firm produce a product in house, and when should it purchase from outside vendors? • Can a firm pass on a tax? What is the effect of taxes on the profit maximizing behavior of firms? • What is the impact of airline deregulation? • What is the optimal amount of pollution? • Do women get paid less then men? Why?

  3. Assumptions In Economics • Economics as Science- abstract model simplifies, requires simplifying assumptions. • Major actors: consumers and producers. • Economic actors are rational: voluntary actions are only undertaken when they are expected to make people better off. • Consumers try to maximize happiness (utility) • Producers try to maximize profits • Our wants are greater than our abilities to fulfill them (scarcity)

  4. Assumptions: Economic Actors Are Rational • Voluntary actions are only undertaken when they are expected to make people better off. • Even people in asylums act economically rationally in most instances, according to experiments.

  5. Assumptions: People Try to Maximize Happiness (Utility) • This does not imply selfish behavior. • If giving to others is what makes you happy, that is what maximizes your utility. • Rationality in this case implies that you wish to maximize your giving to others, not to just have the money wasted.

  6. Assumptions: Firms Try to Maximize Profits • Private for-profit firms are supposed to work for their shareholders, who usually are interested in stock price appreciation, which results from profit maximization. • But, many organizations are not for-profit firms – clubs, government, charities, and so forth. But even if they don’t maximize profits, they still should be interested in efficiency, and also in what happens to the demand for their product when conditions change. • This assumption leads to good predictions about firms behavior, so it doesn’t need to be always true.

  7. Assumptions: Scarcity • Our wants are greater than our abilities to fulfill them (scarcity). Factually correct throughout history. • If we do not have scarcity, then everyone has as much of all products as they want. There would be no trading, no markets, and no prices. • The problem of scarcity could in principle be ‘solved’ either by increasing output or decreasing wants. Some religious or philosophical movements work on decreasing wants; Capitalism tends to go the increasing output route. ‘Problem’ will never be solved.

  8. Some Basic Definitions • Goods: things people want : • Economic goods: goods that are scarce. • Question- must goods have a positive price? Are all positive priced items economic goods? • Opportunity cost: what you give up when you engage in an activity. Measured as the value of your next best activity (the activity you would have engaged in if you didn’t choose the first activity). Example: opportunity cost of going to college.

  9. Production Possibility Curves. • Illustrates concepts of efficiency, scarcity, opportunity cost. • Assumes society with two goods (perhaps Robinson Crusoe with fish and fruit). • Indicates combinations of each good that can be produced. • Example for farmer: amount of two possible commodities he might grow.

  10. Production Possibility Curve slope of line indicates tradeoff in ability to produce different types of goods A Fruit Fish B B1

  11. No Specialized Resources-PPC Straight 2 Production Possibility Curves under 2 scenarios A slope of line indicates tradeoff in ability to produce different types of goods Fruit Fish B B1

  12. Specialized Resources- PPC Curved Line Production Possibility Curve A Fruit Fish B

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