introduction to economics
DESCRIPTION
A brief about micro economicsTRANSCRIPT
Chapter 1
Introduction
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Main Topics
What is microeconomics?Tools of microeconomicsThemes of microeconomicsUses of microeconomics
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The Focus of EconomicsEconomics: Oikonomos (Greek word) which
implies management of household budgetScarcity forces societies to confront three critical
issues:What to produceHow to produce goodsWho gets what
Economics examines how societies address these three issues: allocation of scarce resources in an efficient way such that human wants are satisfied.
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What is Microeconomics?
Microeconomics: concerns individual decision making and its collective effect on allocation of a society’s resources
Macroeconomics: concerns aggregate phenomena
Much of modern macroeconomics involves applications of microeconomics
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Institutions for Allocation Resources
Institutions, including laws and customs, define a society’s procedures for allocating resources
In a capitalist economy:Means of production are owned and
controlled by and for the benefit of private individuals
Resources are allocated by voluntary trading among businesses and consumers
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Institutions for Allocation of Resources
In a communist economy:Economic decisions are highly centralizedThe state owns and controls the means of
production and distribution
No economy is completely centralized or decentralized; all economies are a combination of both.
Examine statistics on the size of government for a rough measure of centralization
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Markets
Markets are the most common form of economic decentralization
Markets are economic institutions that provide people with opportunities and procedures for buying and selling goods and services
May be governed by explicit rules (e.g., NYSE) or by custom (e.g., open bazaar)
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What is a Market?
In microeconomics, a market is:Associated with a single group of closely
related productsOffered for sale within particular geographic
boundaries
Products belong to the same market when they are highly interchangeable
Some markets may be worldwide
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Characteristics of Markets
Markets include buyers and sellersOften, but not always, sellers are companies
and buyers are individualsTrade in modern markets is usually governed
by price, the rate at which someone can swap money for a good
Markets can function only if a system of transferable property rights is established and enforced
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Economic Motives
Need to understand individual motives to determine what choices they will make
Assume people are motivated by self-interest:Desire for goods and servicesCan include possibility that someone might care
about someone else’s well-being
Same motivation even if acting as consumer, firm, or employee
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Scope of Microeconomics
Broad definition of “resources”, not just about money (time, for example)
Range of topics is extremely wide:MarriageCrimeAddictionEnvironment
Many ways decisions by many individuals combine to produce social outcomes
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Tools of Microeconomics
Economists use the scientific method:Initial observationTheorizingIdentification of additional implicationsFurther observation and testingRefinement of the theory
A useful theory must have broad application but also specific implications
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Models and Mathematics
Model: a simplified representation of a complex phenomenon
Economists use models to provide an account of cause and effect, to help us understand how the world works
Some economic models are quantitative (mathematical) so that they are more precise
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Simplifying Assumptions
All scientists build models based on assumptions, so do economists
This allows the model to focus on the most important explanations for a particular phenomenon
No economic model is literally trueSome assumptions are easy to criticizeThe test of a model is its usefulness
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Data Analysis
Scientific method requires models to be tested with data, e.g., from:Records (financial accounts, customer databases)Surveys (Consumer Expenditure Survey, other
government or private sources)Experiments
Econometrics: application of statistical methods to empirical questions in economics
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Themes of Microeconomics: Decisions
Theme 1: Trade-offs are unavoidableThere’s no such thing as a free lunch
Theme 2: Good choices are made at the marginMost decisions are a matter of degree
Theme 3: People respond to incentivesTheme 4: Prices provide incentives
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Themes of Microeconomics: Markets
Theme 5: Trade can benefit everyoneTheme 6: The competitive market price
reflects both value to consumers and cost to producers
Theme 7: Markets have advantagesTheme 8: Sometimes governments can
improve on free-market resource allocations
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Uses of Microeconomics
Why study microeconomics? It’s useful!Tools for understanding and evaluating
the effect of public policiesHelp make important personal and
business decisionsStresses thinking at the margin,
importance of trade-offs
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Uses of Microeconomics
Applications of microeconomics:Business investmentsPortfolio managementEnvironmental policy….and many others
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