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Chapter 1

What is Microeconomics?

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc !ll

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Learning Objectives

What is economics?

What are key assumptions of economics?

What is Prouction Possibi!ity "rontier? What is opportunity cost?

What is the ifference bet#een

microeconomics an macroeconomics?

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What is &conomics?

&conomics is the stuy of human

behavior using math an statistics'

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)ey *ssumptions

Peop!e are se!f$intereste'

Peop!e are rationa!'

Peop!e have un!imite esires but !imiteresources'

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,e!f$-nterest

Most human behavior is motivate by se!f$interest'

,e!f$interest is much more than gree'

-t encompasses anything that makes theperson happy. e'g' chi!ren/s #e!fare.charity'

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,e!f$-nterest

,e!f$intereste peop!e most often take

actions that are in the best interests of

society'

On!y sometimes. se!f$intereste peop!e

take actions that harm society as a #ho!e.

e'g' creating po!!ution'

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ationa! Peop!e

*re you rationa!?

ationa! peop!e consier a!!conse3uences of their actions'

ationa! peop!e take actions that promote

their se!f$interest' ationa! peop!e respon to incentives'

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-nirect &ffects

-ncentives to rationa! peop!e can create inirecteffects of government po!icies'

For example: Po!icy5 Pharmaceutica! companies have to se!!

!ifesaving rugs at !o#er prices to reuce thecost of meica! care'

-nirect effect5 Pharmaceutica! companies spen!ess money on research an eve!opment ofne# rugs'

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-nirect &ffects

7y stuying rationa! ecisions. economics

he!ps to forecast inirect effects of

propose po!icies'

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9n!imite :esires vs' Limite

esources *!! peop!e have un!imite esires but face

!imite resources. #hich means ;scarcity

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=raeoffs

We have to choose #hich #ants to satisfy'

,carcity forces traeoffs'

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Prouction Possibi!ity "rontier >PP"

-f a country prouceson!y computers an=@s. using a!! their

resources5 it can prouce 18mi!!ion computers an+ mi!!ion =@s.

or it can prouce 0mi!!ion computers an12 mi!!ion =@s'

million

Computers

million

Televisions

10

6

5 12

A

B

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Prouction Possibi!ity "rontier >PP"

PP" is a !ine that sho#scombinations of goos acountry can make usingallof its prouctive

resources' -t sho#s traeoffs a

country has to face'

7y moving from one pointto another on PP". acountry has to give upprouction of one goofor another'

million

Computers

million

Televisions

10

6

5 12

A

B

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Prouction Possibi!ity "rontier >PP"

-nsie PP"

A Bot using a!!

resources

A Can prouce more ofboth

Outsie PP"A Prouction is not

possib!e

million

Computers

million

Televisions

C

D

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Opportunity Cost

Opportunity cost

A 7est opportunity !ost'

A @a!ue of the net best a!ternative given forthe chosen action'

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-ncreasing Wea!th

-ncrease in #ea!th resu!ts from increasein prouction'

,pecia!iDation A eve!oping high ski!!s by

concentrating on on!y one task'

Eigh ski!!s A more an better prouction'

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-ncreasing Wea!th

-nnovation

A "ining ne# improve

#ays for prouction'

A -ncrease in prouctionpossibi!ity shifts PP"

out#ars'

Computers

Televisions

O! PP"

Be# PP" after

innovation

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-ncreasing Wea!th

Markets

A @o!untary echange of goos. services.

money an resources'

Markets create #ea!th by proviing incentivesfor trae an specia!iDation'

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Microeconomics vs' Macroeconomics

Microeconomics

A =he stuy of iniviua!s an businesses'

Macroeconomics

A =he stuy of the performance of the entire

economy'

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:o Fou )no#?

:o rationa! peop!e ever make mistakes?

Fes' ationa! peop!e unkno#ing!y makemistakes but avoi the same mistakes in

the future'

Why o #e a!! face traeoffs?

*!! of us have un!imite #ants an !imiteresources so #e have to choose some#ants an give up others'

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:o Fou )no#?

Why might it be cheaper to hire someonee!se to shove! your rive#ay than o it

yourse!f?

Opportunity cost'

Eo# cou! #e ever have too !itt!e po!!ution?

7y giving up most of the goos an services

#e are use to in the moern #or!'

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,ummary

&conomics is the stuy of human behavior'

Microeconomics stuies choices of iniviua!s

an businesses'

Most human behavior is motivate by se!f$interest'

Peop!e face traeoffs because of their !imite

resources to satisfy un!imite #ants' ,pecia!iDation. innovations an markets increase

#ea!th'

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Coming 9p

What is a market?

What is eman an supp!y?

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