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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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