Basics of Course

1
Basics of Course

• What is economics about? Micro economics.?
• Current def whatever economists study - not a
  very useful definition of a discipline.
• Historical and more useful definition allocation
  of scarce goods for competing ends.
• In reality, it focuses mainly on how free
  markets, consisting of voluntary participants,
  operate.
• It can also be used to analyze other non-market
  forms of production and distribution.

2
What Types Of Questions Do Micro-economists Try
To Answer?

1. What pricing strategies allow firms to maximize
   profits?
2. When should a firm produce a product in house,
   and when should it purchase from outside vendors?
3. Can a firm pass on a tax? What is the effect of
   taxes on the profit maximizing behavior of firms?
4. What is the impact of airline deregulation?
5. What is the optimal amount of pollution?
6. Do women get paid less then men? Why?

3
Assumptions In Economics

• Economics as Science- abstract model simplifies,
  requires simplifying assumptions.

• Major actors consumers and producers.

• Economic actors are rational voluntary actions
  are only undertaken when they are expected to
  make people better off.

• Consumers try to maximize happiness (utility)

• Producers try to maximize profits

• Our wants are greater than our abilities to
  fulfill them (scarcity)

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Assumptions Economic Actors Are Rational

1. Voluntary actions are only undertaken when they
   are expected to make people better off.
2. Even people in asylums act economically
   rationally in most instances, according to
   experiments.

5
Assumptions People Try to Maximize Happiness
(Utility)

1. This does not imply selfish behavior.
2. If giving to others is what makes you happy, that
   is what maximizes your utility.
3. Rationality in this case implies that you wish to
   maximize your giving to others, not to just have
   the money wasted.

6
Assumptions Firms Try to Maximize Profits

1. Private for-profit firms are supposed to work for
   their shareholders, who usually are interested in
   stock price appreciation, which results from
   profit maximization.
2. But, many organizations are not for-profit firms
   clubs, government, charities, and so forth. But
   even if they dont maximize profits, they still
   should be interested in efficiency, and also in
   what happens to the demand for their product when
   conditions change.
3. This assumption leads to good predictions about
   firms behavior, so it doesnt need to be always
   true.

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Assumptions Scarcity

1. Our wants are greater than our abilities to
   fulfill them (scarcity). Factually correct
   throughout history.
2. If we do not have scarcity, then everyone has as
   much of all products as they want. There would be
   no trading, no markets, and no prices.
3. The problem of scarcity could in principle be
   solved either by increasing output or
   decreasing wants. Some religious or philosophical
   movements work on decreasing wants Capitalism
   tends to go the increasing output route.
   Problem will never be solved.

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Some Basic Definitions

• Goods things people want
• Economic goods goods that are scarce.
• Question- must goods have a positive price? Are
  all positive priced items economic goods?
• Opportunity cost what you give up when you
  engage in an activity. Measured as the value of
  your next best activity (the activity you would
  have engaged in if you didnt choose the first
  activity). Example opportunity cost of going to
  college.

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Production Possibility Curves.

1. Illustrates concepts of efficiency, scarcity,
   opportunity cost.
2. Assumes society with two goods (perhaps Robinson
   Crusoe with fish and fruit).
3. Indicates combinations of each good that can be
   produced.
4. Example for farmer amount of two possible
   commodities he might grow.

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Production Possibility Curve
slope of line indicates tradeoff in ability to
produce different types of goods
A
Fruit
Fish
B
B1
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No Specialized Resources-PPC Straight
2 Production Possibility Curves under 2 scenarios
A
slope of line indicates tradeoff in ability to
produce different types of goods
Fruit
Fish
B
B1
12
Specialized Resources- PPC Curved Line
Production Possibility Curve
A
Fruit
Fish
B