Transcript Chapter 1

Econ 2610: Principles of
Microeconomics
Yogesh Uppal
Email: [email protected]
Chapter 1
Thinking Like an Economist
Microeconomics vs
Macroeconomics
 Microeconomics studies choice and its implications
for price and quantity in individual markets
 Sugar
 Carpets
 House cleaning services
 Microeconomics considers topics such as
 Costs of production
 Demand for a product
 Exchange rates
Microeconomics vs
Macroeconomics

Macroeconomics studies the performance of
national economies and the policies that
governments use to try to improve that
performance
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Inflation
Unemployment
Growth
Macroeconomics considers
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
Monetary policy
Deficits
Tax policy
Learning Objectives
1.
2.
3.
The Scarcity Principle: having more of any good
thing necessarily requires having less of something
else
The Cost-Benefit Principle: an action should be
taken if and only if its benefit is at least as great as
its costs
The Incentive Principle: examine people's
incentives to predict their behavior
The Scarcity Principle
Economics: The study of choices and
results under scarcity
The Scarcity Principle: Unlimited wants
and limited resources means having
more of one good means having less of
another.
Also called No Free-Lunch Principle
The Cost-Benefit Principle
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Take an action if and only if the extra benefits
are at least as great as the extra costs
Costs and benefits are not just money
Marginal
Benefits
Marginal
Costs
Cost – Benefit Example
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Walk to town to save $10 on an item?
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Benefits are clear
Costs are harder to define
 Would you walk to town if someone paid
you $9?
 If you would walk to town for less than $10,
you gain from buying the item in town
Cost – Benefit Principle
Examples
You clip
grocery
coupons but
Bill and
Melinda
Gates do not
You speed on
the way to
work but not
on the way to
school
At the ball
park, you pay
extra to buy a
soda from the
hawkers in
the stands
You skip your
regular dental
check-up
Economic Surplus

Benefit of an action minus its costs
Total
Costs
Total Benefits
Economic
Surplus
Opportunity Cost

The value of what must be foregone in order
to undertake an activity
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Consider explicit and implicit costs
(Caution: NOT the combined value of all
possible activities
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Opportunity cost considers only your best
alternative)
Three Decision Pitfalls
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Economic analysis predicts likely behavior
Three general cases of mistakes
1.
2.
3.
Measuring costs and benefits as proportions
instead of absolute amounts
Ignoring implicit costs
Failure to think at the margin
Pitfall #1
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Measuring costs and
benefits as
proportions instead
of absolute amount
 Would you walk to
town to save $10 on
a $25 item?
 Would you walk to
town to save $10 on
a $2,500 item?
Marginal
Benefits
Marginal
Costs
Action
Pitfall #2

Explicit
Costs

Opportunity
Cost
Implicit
Costs
Ignoring implicit costs
 Consider your
alternatives
The value of a
Frequent Flyer coupon
depends on its next
best use
 Expiration date
 Do you have time for
another trip?
 Cost of the next best
trip
Pitfall #3
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Failure to think at the
margin
 Sunk costs cannot be
recovered
Examples:
 Eating at an all-youcan-eat restaurant
 Attend a second year
of law school
Marginal
Benefits
Marginal
Costs
Marginal Analysis Ideas
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Marginal cost is the increase in total cost
from one additional unit of an activity
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Marginal benefit is the increase in total
benefit from one additional unit of an activity
Normative and Positive
Economics
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Normative economic
statements say how
people should behave
 Gas prices are too
high
 Building a space base
on the moon will cost
too much

Positive economic
statements predict how
people will behave
 The average price of
gasoline in May 2008
was higher than in
May 2007
 Building a space base
on the moon will cost
more than the shuttle
program
Incentive Principle
Incentives are central to people's choices
Benefits
Costs
Actions are more likely
to be taken if their
benefits rise
Actions are less likely to
be taken if their costs
rise
Economics Is Everywhere
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There are many things that economics can
help to explain
Economic Naturalist topics
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Why is expensive software bundled with PCs?
Why can't you buy a car without heaters
Drive-up ATMs with Braille