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Dr. Katherine Sauer Principles of Microeconomics ECO 2020

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I. What is economics?

Economics is the study of the use of scarce resources

which have alternative uses.

What do we mean by scarce?

Human desires exceed our resources.

What do we mean by resources?

time, money, fresh water, your skills

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What do we mean by alternate uses?

What are 3 things you could spend your time on?

What are 3 things you could spend your money on?

What are 3 careers you could pursue that would

utilize your skills?

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Microeconomics focuses on the decision making of

economic actors (e.g. consumers, producers).

Macroeconomics focuses on economy-wide

phenomena (e.g. unemployment).

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II. 10 Basic Principles of Economics

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A. How People Make Decisions

Principle #1 People Face Tradeoffs

Infinite options for spending your time but time isscarce you face tradeoffs.

Infinite options for spending your money butmoney is scarce you face tradeoffs.

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Think of a tradeoff that you recently faced.

What were the options you were decidingbetween?

Why did you go with the option you chose?

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Recognizing that people face trade-offs does not by

itselftell us what decisions they will or should make.

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A common tradeoff for society is between efficiency and

equity.

efficiency = getting the most out of a scarce

resource

equity = equally distributing resources

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Principle #2: The Cost of Something is What You Give Up

To Get It

Because people face trade-offs, making decisions requires

comparing the costs and benefits of alternative courses of

action.

Costs are not simply monetary in nature.

The opportunity cost of an item/action includes anymoney cost as well as any forgone opportunities.

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What is your personal opportunity cost of being inclass today?

What is the opportunity cost of a college education?

What is the opportunity cost of spending tax dollars on

national health care?

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Principle #3: Rational People Think at the Margin

Rational means only doing things when the benefits

outweigh the costs.

Rational people know that decisions in life are rarely black

and white but usually involve shades of gray.

The term marginal is used to describe small incrementaladjustments to an existing plan of action.

(decisions are rarely all-or-nothing)

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While you are studying for an economics exam, you

decide

whether or not to study another hour.

marginal benefit vs marginal cost

While you are at a party, you decide whether or not to

stay for a bit longer.marginal benefit vs marginal cost

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Principle #4: People Respond to Incentives

An incentive is something that induces a person to act

- the prospect of a punishment

- the prospect of a reward

Why do we tax cigarettes?

Why do parents often give their kids allowances?

Why must I give exams and homework in this class

instead of inviting you to learn the material on your

honor?

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B. How People Interact

Principle #5: Trade Can Make Everyone Better Off

Modern economies are based on the concepts of

specialization and trade.

At the individual level,we specialize in a skill, get paid todo it, and trade the money to buy other things.

Firms specialize in the production ofcertain goods/services

and purchase the inputs needed.

Trade allows countries to specialize in what they do best

and to enjoy a greater variety of goods and services.

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Pair/Trio Question

Your roommate is a better cook than you are. You arean adequate cook but a way faster cleaner than your

roommate.

Explain how specialization and trade could make youboth better off.

Share your intended majors/careers with each other.

Explain how this is a form of specialization and howyou will be trading to get the other things you want in

life.

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Principle #6: Markets are Usually a Good Way to

Organize Economic Activity

Communist countries worked on the premise that

government officials were in the best position to allocate

the economy's scarce resources.

Government decides:

-what goods and services were produced

- how much was produced

- who produced and consumed these goods andservices

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In a market economy, the decisions of a central

planner are replaced by the decisions offirms and

households.

Government is still needed in a market economy.

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Principle #7: Governments Can Sometimes Improve

Market Outcomes

The invisible hand can work its magic only if the

government enforces the rules and maintains the

institutions that are key to a market economy.

-property rights, sound currency, justice system

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Also, the market doesnt work well in all situations:1. externalities (impact of one person's actions on

the well-being of a bystander)

- pollution

2. non-profitable goods

- basic research

3. concentrated market power

- monopolies

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C. How the Economy as a Whole Works

Principle # 8: A Country's Standard of Living Depends on

Its Ability to Produce Goods and Services

Almost all variation in living standards is attributable to

differences in countries' productivity.

- amount of goods and services produced from each

unit of labor input

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Principle #9: Prices Rise When the Government Prints

Too Much Money

In almost all cases of large or persistent inflation, the

culprit is growth in the quantity of money.

When a government creates large quantities of the

nation's money, the value of the money falls.

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Principle #10: Society Faces a Short-Run Trade-off

between Inflation and Unemployment

Over the short run, many economic policies pushinflation and unemployment in opposite directions.

This short-run trade-off plays a key role in the analysis of

the business cycle.

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III. Assignment for the next class

1. Register for and log in to our course website. Look

around and note any questions that you have about it.

- electronic textbook & interactive homework

2. Read the syllabus and note any questions that you

have about it.

3. Complete the chapter 1 worksheet, due at the

beginning of next class.