Principles of Microeconomics

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Principles of Microeconomics

• Introduction and Chapter 1

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Introduction Outline

• Economics
• Micro versus Macro
• Modeling decision making
• The Scarcity Principle
• Cost/Benefit Analysis
• Opportunity costs
• Cautions
• Discuss Articles on Price Gouging
• Normative versus positive economics
• Government Policy Objectives
• Ceteris Paribus

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Introduction

• Economics
• The study of how individuals and societies choose
  to use the scarce resources.
• Studies the results of these decisions for
  society as a whole, and whether or not there is a
  role for the government to improve the outcome

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Introduction

• Microeconomics focuses on behavior of
  individual decision-making units
• Households, firms
• Macroeconomics examines the economic behavior
  of aggregates (income, employment, output, and so
  onon a national scale).

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Modeling Decision Making the Scarcity Principle

• Scarcity not enough available to satisfy
  boundless wants and needs
• Having more of one thing, means giving up
  something else
• No such thing as a free lunch
• Even if someone offers to buy your lunch, you
  must still devote your time that could have been
  spent doing something else.

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Modeling Decision Making Cost-Benefit Analysis

• In modeling behavior of individuals, we will
  generally assume that they are rational and
  choose a course of action if the extra benefits
  exceed the extra costs
• Must correctly measure these costs and benefits

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Cost-Benefit Analysis

• Full cost of a decision includes both monetary
  costs as well as the value of the next best
  alternative use of time that must be forgone
• Opportunity coststhe value of the best
  alternative that we forgo, or give up, when we
  make a choice or decision
• Note not the value of all missed
  opportunities-only the best, most valuable one.
• Includes both time and direct monetary costs.

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Cost-Benefit Analysis

• Example What are the total additional costs
  associated with attending Texas AM for one year?
• Monetary costs
• Tuition
• Books
• Other? Housing and Food?
• Time costs(assuming working full-time is best
  alternative use of time)
• Forgone Wages
• Total

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Cost-Benefit Analysis

• Example You receive a free ticket to a concert
  that you could sell for 50. What is the
  opportunity cost of going to the concert?
• Opportunity Costs
• Time costs value of next best alternative use of
  time
• Monetary costs 50 because you could have sold
  the ticket.

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Cost-Benefit Analysis

• Example Instead of using a realtor who would
  charge a 6 commission to sell his home worth
  100,000, Sam decides to sell it himself.
• He says to himself Im saving 6,000. Is he
  correct?
• No. He has to invest time showing and marketing
  the house, plus other direct advertising and
  legal fees which he has not subtracted from this
  figure.

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Cost-Benefit Analysis-Cautions

• Use marginal analysis
• Marginalism analyzing the additional or
  incremental costs or benefits arising from a
  choice or decision.
• Example
• Would not include food costs as part of the
  additional costs to attend AM since you would
  have to buy this anyway.

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Cost-Benefit Analysis-Cautions

• Ignore Sunk Costs
• sunk costs Costs that cannot be avoided,
  regardless of what is done in the future, because
  they have already been incurred.
• Example
• You bought a ticket for a concert ticket for 50.
  The concert is on October 1 (the day before your
  1st Micro Exam!!). You, being a super-diligent
  student, prefer to study and try, unsuccessfully,
  to sell your ticket.
• What do you do?

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Cost-Benefit Analysis-Cautions

• Dont forget to include time costs or you will
  underestimate the true costs.
• Compare costs in absolute terms rather than
  proportions.
• Example You can buy a computer for 2020 at the
  campus bookstore, or downtown (requiring a 30
  minute walk) for 2014. You value the next best
  alternative use of your time at 10 per hour.

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Economics Outcomes

• Economics also studies the results of these
  decisions for society as a whole, and whether or
  not there is a role for the government to improve
  the outcome
• Consider the price gouging articles that were
  assigned. Should price gouging be legal or should
  the government prohibit/limit this activity?

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Price Gouging

• Price Gouging
• when sellers ask a price that is much higher than
  what is fair given the circumstances
• When does it occur?
• Typically, hear about it after natural disasters
  (hurricanes)

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Price Gouging

• What types of goods?
• Gas, water, ice, generators, hotels, plywood,
  chainsaws etc.
• Why possible for sellers to do this?

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Price Gouging Why do prices rise?

• Supply Cutoff
• Inventories destroyed
• Roads blocked
• Structures and infrastructure damaged
• Now more costly to acquire goods to sell.
• Less competition.

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Price Gouging Why do prices rise?

• Demand Increase
• Power out and no running water
• Homes damaged
• Trees on houses
• Increase in Demand for certain types of goods

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Price Gouging

• Legal or illegal?
• Certain limitations on price hikes
• H.R. 1252
• Bill recently passed by the House
• Has not yet become law
• It shall be unlawful for any person to sell, at
  wholesale or at retail in an area during a period
  of an emergency gasolineat a price that
• (A) is unconscionably excessive
• and
• (B) indicates the seller is taking unfair
  advantage of the circumstances related to an
  energy emergency to increase prices
  unreasonably

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Price Gouging

• What are the arguments for/against price gouging
  laws?
• What might be the costs and benefits of this type
  of government intervention?

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Price Gouging

• For prohibiting price increases
• Certain commodities should be affordable to all
  people
• Suppliers should not be allowed to take advantage
  of people in desperate circumstances
• Against prohibiting price increases
• Ambiguous language of laws
• If the issue is market power, then there are
  already laws (antitrust law) that prohibit
  anti-competitive behavior.
• Will not send signals to the market to increase
  supply
• Will cause shortages
• Claims two choices high prices or no goods
  available

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Positive versus Normative Economics

• positive economics An approach to economics that
  seeks to understand behavior and the operation of
  systems without making judgments. It describes
  what exists and how it works.
• Examples
• What determines the wage rate for unskilled
  workers?
• What would happen if we raised tariffs on all
  auto parts?

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Positive versus Normative Economics

• normative economics An approach to economics
  that analyzes outcomes of economic behavior,
  evaluates them as good or bad, and may prescribe
  courses of action. Also called policy economics.
• Examples
• Should the government subsidize higher education?
• Should the government prohibit price gouging?

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Objectives of Economic Policy

• Criteria for judging economic outcomes
• 1. Efficiency
• 2. Equity
• 3. Growth
• 4. Stability

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Objectives of Economic Policy

• efficiency In economics, allocative efficiency.
  An efficient economy is one that produces what
  people want at the least possible cost.
• When goods go to the people who value them most.
• equity Fairness.

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Objectives of Economic Policy

• economic growth An increase in the total output
  of an economy.
• stability A condition in which national output
  is growing steadily, with low inflation and full
  employment of resources.

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Ceteris ParibusAll Else Equal

• When analyzing economic outcomes, we often take
  the approach of assuming only one variable
  changes, and assuming all other relevant factors
  remain constant