Principles of Economics: Individual & Economy-Wide Interactions, Apuntes de Microeconomía

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Chapter 1

©2010  Worth Publishers First Principles Slides created by Dr. Amy Scott

One must choose

To understand how an

economy works, you

need to understand more

than how individuals

make choices.

Common

Ground

Through the study of economics, we

will discover common principles

about individual choice and

interaction.

What is Economics?

 Economics: social science that studies the production, distribution and consumption of goods and services from the Greek oikonomia meaning administration or management of a household  (^) Economy: system for coordinating society’s productive activities  (^) Market economy: an economy in which decisions about production and consumption are made by individual producers and consumers

Learning the Language of Economics:

Definitions

 Microeconomics: branch of economics concerned with how people make decisions and how these decisions interact  Macroeconomics: branch of economics concerned with the overall economy  Market failure: when individual pursuits of self- interest lead to bad results for society

Three Principles:

Principle #1: Individual Choice

 Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do  (^) Basic principles behind the individual choices: A. Resources are scarce. B. The real cost of something is what you must give up to get it. C. “How much?” is a decision at the margin. D. People take advantage of opportunities to make themselves

Basic Principles of Individual Choice

Resources

 A resource is anything that can be used to produce something else.  Ex.: Land, labor (time of workers), capital (machines)  Resources are scarce – the quantity available is not large enough to satisfy all productive uses.  Ex.: Petroleum, lumber, intelligence

Basic Principles of Individual Choice

Opportunity Cost (Continued)

 Opportunity cost is about what you have to forgo to obtain your choice.  The bumper stickers that say “I would rather be … (fishing, golfing, swimming, etc…)” are referring to the “opportunity cost.”  (^) The opportunity cost of attending college is high : it’s the cost of tuition and housing plus the forgone salary you could have earned.

I WOULD RATHER BE SURFING THE INTERNET

 (^) At many cash registers there is a little basket full of pennies. People are encouraged to use the basket to round their purchases up or down.  If it’s too small a sum to worry about, why calculate prices that exactly? Why do we have pennies?  (^) Sixty years ago, a penny was equivalent to 30 seconds worth of work—it was worth saving a penny if doing so took less than 30 seconds. But wages have risen along with overall prices. Today a penny is therefore equivalent to just over 2 seconds of work—and so it’s not worth the opportunity cost of the time it takes to worry about a penny more or less.  (^) The rising opportunity cost of time in terms of

Got a Penny?

Basic Principles of Individual Choice Marginal Analysis (continued)  (^) Making trade-offs at the margin : comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less.  Ex.: Studying one more hour, eating one more cookie, buying one more CD, etc.  (^) The study of such decisions is known as marginal analysis.

Basic Principles of Individual Choice Exploiting Opportunities  People usually take advantage of opportunities to make themselves better off.  People respond to incentives.  (^) Ex.: If the price of parking in Manhattan rises, commuters who can find alternative ways to get to their job will save money.  Incentives: anything that offers rewards to people who change their behavior.

 (^) In 1900, only 6 percent of married women worked for pay outside the home.  By 2005, the number was about 60 percent. This change is in part due to changing attitudes, invention, and the growing availability of home appliances, especially washing machines.  In pre-appliance days, the opportunity cost of working outside the home was very high: it was something women typically did only in the face of dire financial necessity.  With modern appliances, the opportunities available to women changed—and the rest is

A Woman’s Work

Principle #2:

Choice Interaction

Interaction of choices—my choices affect your choices, and vice versa—is a feature of most economic situations. Principles that underlie the interaction of individual choices: A. There are gains from trade. B. Markets move toward equilibrium. C. Resources should be used as efficiently as possible to achieve society’s goals. D. Markets usually lead to efficiency. E. When markets don’t achieve efficiency, government intervention can improve society’s

This increase in output is due to specialization : each person specializes in the task that he or she is good at performing. © The New Yorker Collection ^1991 Ed Frascino from cartoonbank.com. All Rights Reserved. The economy, as a whole, can produce more when each person specializes in a task and trades with others.

There Are Gains From Trade

“I hunt and she gathers – otherwise we couldn’t make ends meet.”

Basic Principles of Choice Interaction Equilibrium  (^) An economic situation is in equilibrium when no individual would be better off doing something different.  Any time there is a change, the economy will move to a new equilibrium. 

Ex.: What happens when a new checkout

line opens at a busy supermarket?