Microeconomics ECON 2302 Spring 2011

1. MicroeconomicsECON 2302Spring 2011 Marilyn Spencer, Ph.D. Professor of Economics Introduction to course & Chapter 1

2. 1. Your name 2. year in college (1st, 2nd, etc.) 3. major - or “deciding” 4. ECON course in high school - “yes” or “no” 5. If you’re working this semester, whether as volunteer or for pay, approx. # of hours/week, - or “N/A” 6. Last math class successfully completed in college - or “N/A” 7. Last economics class successfully completed in college - or “N/A” 8. Usual source of local & national news 9. Any particular topic you’d like us to consider as part of this course 10. Career goal(s) Please fill out and return index card - PRINT LEGIBLY:

3. Today’s topics: • Introduction to course • Introduction to/review of basic economics concepts

5. Online Syllabus – go to my site and make a few clicks: • Contact information • Texts • Course description • Course outline • Role of course in you undergraduate curriculum • Course methodology • Course content • Grades

6. Reality check, to be completed before the next class: • Read Chapter 1 of Hubbard & O’Brien and be able to answer: • 3rd edition: Review Questions p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 (2nd edition: p. 20, 1.2; p. 21, 2.1 & 2.3; p. 22, 3.1 & 3.3 ; 1st edition: p. 19, 1, 3, 5, 6 & 8) • 3rd edition: Problems and Applications p. 22, 2.7; p. 23, 3.8 (2nd edition: p. 22, 2.7; p. 23, 3.8 ; 1st edition: p. 20, 13 and 15)

7. 1 CHAPTER Economics:Foundationsand Models Bill Gates, chairman of Microsoft, testified before Congress in 2008 that limiting the number of foreign technical workers allowed into the United States was resulting in a “critical shortage of scientific talent.”

8. 1 3 4 5

9. Economics: Foundations & Models • We use economics to answer questions such as the following: • How are the prices of goods and services determined? • How does pollution affect the economy, and how should government policy deal with these effects? • Why do firms engage in international trade, and how do government policies affect international trade? • Why does government control the prices of some goods and services, and what are the effects of those controls?

10. Economics: Foundations and Models,cont. 4.1 Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics The study of the choices people make to attain their goals, given their scarce resources. Economic model A simplified version of reality used to analyze real-world economic situations.

11. 1.1 LEARNING OBJECTIVE Three Key Economic Ideas Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas: 1.People are rational. 2.People respond to economic incentives. 3.Optimal decisions are made at the margin.

12. Economics rationality assumption: People behave rationally. That is, we make rational choices. We generally assume that rational people: Feel that more is better than less. Strive to do what will make them better off, given the information they have.

13. Assumption that we respond to incentives: • People respond to the conditions that we operate under, by responding to both: • Positive incentives • Negative incentives “Marginal” assumption: People make decisions based on what is currently relevant: Marginal analysis Analysis that involves comparing marginal benefits and marginal costs, where marginal refers to the benefit or cost of the next, or last, choice.

14. Implications Being self-interested, people will weigh the costs and benefits of various alternatives, choosing that alternative that makes them best off at the margin. This behavior is called “economic decision making.” Costs and benefits are sometimes referred to as negative and positive incentives. Hence, according to the economic reasoning, incentives matter.

15. MakingtheConnection More than 45 countries in Europe & Asia have taken steps to try to raise their birthrates. These policies suggest that people may respond to economic incentives even when making the very personal decision of how many children to have. Will Women Have More Babies if the Government Pays Them To?

16. 1.2 LEARNING OBJECTIVE Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? The Economic Problem Every Society Must Solve Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service. Opportunity cost The highest-valued alternative that must be given up to engage in an activity. • Trade-offs force society to make choices when answering the following 3 fundamental questions: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced?

17. Economic Problem Every Society Must Solve, cont. • Centrally Planned Economies v. Market Economies Centrally planned economy An economy in which the government decides how economic resources will be allocated. Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources.

18. Economic Problem Every Society Must Solve, cont. • The Modern “Mixed” Economy Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. What economic agents are involved in a mixed economy? • Buyers and sellers • Federal, state and local governments • Private non-profit agencies • Foreign governments

19. Economic Problem Every Society Must Solve, cont. Productive efficiency A situation in which a good or service is produced at the lowest possible cost. • Efficiency and Equity Allocative efficiency A state of the economy in which 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. Voluntary exchange A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction. Equity The fair distribution of economic benefits.

20. 1.3 LEARNING OBJECTIVE Economic Models Understand the role of models in economic analysis. • To develop a model, economists generally follow these steps: • Decide on the assumptions to use in developing the model. • Formulate a testable hypothesis. • Use economic data to test the hypothesis. • Revise the model if it fails to explain well the economic data. • Retain the revised model to help answer similar economic questions in the future.

21. Economic Models, cont. Economic models make behavioralassumptions about the motives of consumers and firms. • The Role of Assumptions in Economic Models Forming and Testing Hypotheses in Economic Models Economic variable Something measurable that can have different values, such as the wages of software programmers. • Normative and Positive Analysis Positive analysis Analysis concerned with what is. Normative analysis Analysis concerned with what ought to be.

22. MakingtheConnection 1.3 LEARNING OBJECTIVE Understand the role of models in economic analysis. Should the Federal Government Have Increased Restrictions on the Immigration of Skilled Workers? Like many other policy debates, the debate over the immigration of skilled workers has both positive and normative elements. The debate over the immigration of skilled workers demonstrates that economics is often at the center of important policy issues. Does restricting the immigration of skilled workers affect the employment opportunities of recent U.S. graduates?

23. Economic Models, cont. • Economics as a Social Science Because economics studies the actions of individuals, it is a social science. Economics is therefore similar to other social science disciplines, such as psychology, political science, and sociology. As a social science, economics considers human behavior - particularly decision-making behavior - in every context, not just in the context of business.

24. 1.4 LEARNING OBJECTIVE Microeconomics and Macroeconomics Distinguish between microeconomics and macroeconomics. Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

25. AN INSIDELOOKat Policy Do Immigrants Displace or Complement Domestic Workers? >> Figure 1. Foreign-Born Scientists and Engineers as a Percentage of All Scientists and Engineers in the United States Figure 2. Foreign Recipients of U.S. Science and Engineering Doctorates, 1985–2005

26. KEY TERMS Allocative efficiency Centrally planned economy Economic model Economic variable Economics Equity Macroeconomics Marginal analysis Market Market economy Microeconomics Mixed economy Normative analysis Opportunity cost Positive analysis Productive efficiency Scarcity Trade-off Voluntary exchange

27. Preview of Important Economic Terms 1.5 LEARNING OBJECTIVE Become familiar with important economic terms. • Entrepreneur • Innovation • Technology • Firm, company, or business • Goods • Services • Revenue • Profit • Household • Factors of production, or economic resources • Capital • Human capital

28. If you had to choose only one word to tell someone what economics is all about, what would that one word be? ?

29. 1-1 Solved Problem Apple Computer Makes a Decision at the Margin Should Apple produce an additional 1 million iPhones? In solving the problem, consider the following: • Optimal decisions are made at the margin. • An activity should be continued to the point where the marginal benefit is equal to the marginal cost. • In this case, the correct decision requires information about additional revenue and additional cost.

30. Introduction/Chapter 1 definitions: • Syllabus • Definitions: • economics • microeconomics/macroeconomics • resources • allocation • distribution • scarcity • opportunity cost • market • efficiency • equity

31. Quiz 1 Before class on Friday, January 21, send me an email from the email address you’ll be using regularly during this course. My email address is marilyn.spencer@tamucc.edu. 4 points

32. Questions?

33. Reality check, to be completed before the next class: • Read Chapter 2: • 3rd edition: Review Questions p. 58, 1.2, 1.3; p. 60, 2.2; p. 62, 3.1 (2nd edition: p. 60, 1.2, 1.3; p. 62, 2.2; p. 63, 3.1; 1st edition: pp. 56-57, 2, 3, 5, 6 & 11). • 3rd edition: Problems and Applications p. 58-59, 1.4 & 1.8; p. 60, 2.4 (2nd edition: p. 60-61, 1.4 & 1.8; p. 62, 2.4 ; 1st edition: pp. 57 & 59, 1, 5 and 11).