Introduction to Microeconomics ECON 2020 Section 003 Dr. Jessica MerkleOutline • Welcome • Brief Introduction • Syllabus • Structure of the course • Turning Point App • Instructions • Economics • What is it? • What do economists do?Welcome • Welcome to Introduction to Microeconomics • Dynamics of a large lecture classDr. Jessica Merkle • My baDon't forget about the age old question of with what compound will nh3 experience only dispersion intermolecular forces?
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ckground • Contact Information • Office: Haley 0305 • Email: email@example.com • Office Hours: Tuesdays and Thursdays from 11:00am-12:00pm or by appointment • By appointment means you must email meSyllabus • https://auburn.instructure.com/courses/1028383/assignments/syllab us • Important Class Information and Policies • How is my grade in this course determined? • Canvas • Turning Point App • Fixed exam dates • Policy for missing exams • Policy for late work • Policy for quizzesTurning Point App: ResponseWare • Registration • You must create an account on turningtechnologies.com • There are step by step registrations instructions available on Canvas under WEEK 1 • https://auburn.instructure.com/courses/1028383/pages/download-and-set-up-turning point-app?module_item_id=8644943 • You must purchase the app. The least expensive way is to purchase it directly through the company • For mobile phone users, it can be purchased from Google Play Store or the App Store. • To use ResponseWare on another web-enabled device, visit responseware.turningtechnologies.com (Links to an external site.)Turning Point App: ResponseWare • Add our class • To enroll in our class you will need to search for • Name: Principles of Microeconomics, • ID: ECO 2020 • MerkleTurning Point App: ResponseWare • Will be used for a quiz at the end of class every Thursday. • You must be present for the entire class period to take the quiz. • Our first quiz will be next Thursday, January 19th. • Set up app before Tuesday, January 17th. • We will do a “dry run” in class to make sure everyone’s device is working. • Contact me with any issues before Tuesday so that I can help you address them. • For instance if you do not have access to a portable web-enabled device, let me know. • Academic honesty policy • Using another individual’s device is a violation of the Academic Honesty policies. • Any individual found doing so will be reported to the Dean of Students office for an act of academic dishonesty.Economics • The following material follows (at least to a large extent) Ch. 1 of your textbook. • At the end of our coverage of Ch. 1, you should be able to answer the following general questions • What kinds of questions does economics address? • What are the principles of how people make decisions? • What are the principles of how people interact?Economics: A definition • What is economics? • Scarcity-All resources are limited • Economics is the study of how society manages its scarce resources. • Examples • How individual’s decide how much to work, what to buy, and how much to save or spend • How firm’s decide how much to produce, how many workers to hire, and possible the attributes and price of their product • How society decides how much resources to allocate to national defense, education, production of consumer goods, the environment, etcMicroeconomics: A definition • Microeconomics is the branch of economics that focuses on how individuals make decisions and how individual agents interact • Macroeconomics is the branch of economics that focuses on how whole economies make decisions and interactHow individuals make decisions Principle 1: People face tradeoffs. All decisions involve tradeoffs. Examples: • Going to a party the night before your midterm leaves less time for studying. • Having more money to buy stuff requires working longer hours, which leaves less time for leisure. • Protecting the environment requires resources that could otherwise be used to produce consumer goods.How individuals make decisions Principle 1: Society faces tradeoffs. • Society faces an important tradeoff: efficiency vs. equality • Efficiency: when society gets the most from its scarce resources • Equality: when prosperity is distributed uniformly among society’s members • Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.” How individuals make decisions Principle 2: The cost of something is what you give up to get it • Making decisions requires comparing the costs and benefits of alternative choices. • The opportunity cost of any item is whatever must be given up to obtain it. • It is the relevant cost for decision making.Opportunity Cost Examples The opportunity cost of… …going to college for a year is not just the tuition, books, and fees, but also the foregone wages. …seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater. In-class excercises • https://auburn.instructure.com/courses/1028383/files?preview=993 19044How individuals make decisions Principle 3: Rational people think at the margin Rational people….. • systematically and purposefully do the best they can to achieve objectives • Rational people have an objective function, i.e. have a goal they are attempting to maximize • Consumers • Maximize well-being (utility) subject to prices and income • Define utility • Firms • Maximize profits • Define profitsHow individuals make decisions Principle 3: Rational people think at the margin Rational people…. • Make decisions by evaluating costs and benefits of marginal changes • Marginal changes are incremental adjustments to an existing plan • For instance, • If I am buying sliced turkey at the deli counter, the marginal change is whether I should buy another half pound or not • Deciding to attend another year of college • A manager of a firm deciding to buy another unit of input • Individuals maximize their objective function when Marginal benefit=Marginal costThinking at the margin examples • 1. The diamond-water paradox: water is essential for life but virtually free; diamonds are inessential but expensive. • Starting amount matters • Diminishing marginal returns • 2. The near-zero marginal cost of an airline taking an extra passenger when the flight isn’t full.Thinking at the margin excercise • https://auburn.instructure.com/courses/1028383/files/99996077?m odule_item_id=8741215How individuals make decisions Principle 4: People respond to incentives • Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. • Rational people respond to incentives. Examples: • When gas prices rise, consumers change vacation plans or carpool. • When cigarette taxes increase, teen smoking falls. • After-school childcareHow individuals make decisions Principle 4: People respond to incentives • Many public policies change the costs and benefits that people face. • Sometimes policymakers fail to understand how policies alter incentives and behavior and a policy may lead to unintended consequences. • Examples: • Overtime pay • Maternity leave • Schools Finance ReformIncentives example You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? Explain. A. Blue book value (what you could get for the car) is $6500 if transmission works, $5700 if it doesn’t B. Blue book value is $6000 if transmission works, $5500 if it doesn’tIncentives example • Observations: • The $1000 you previously spent on repairs is irrelevant. What matters is the cost and benefit of the marginal repair • The change in incentives from scenario A to B is what causes you to actHow individuals interact Principle 5: Trade can make everyone better off • Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. • Countries also benefit from trade and specialization: • Get a better price abroad for goods they produce • Buy other goods more cheaply from abroad than could be produced at homeTrade example • Where did your clothes come from? • Who worked to produce your clothes? • What things do you consider when buying a garment? • Where were your clothes produced (what countries)?How individuals interact Principle 6: Markets are usually a good way to organize economic activity • Market: a group of buyers and sellers (need not be in a single location) • “Organize economic activity” means determining • what goods to produce • how to produce them • how much of each to produce • who gets themHow individuals interact Principle 6: Markets are usually a good way to organize economic activity • A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. • Famous insight by Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being. invisible hand=pricesHow individuals interact Principle 6: Markets are usually a good way to organize economic activity • The invisible hand works through the price system: • The interaction of buyers and sellers determines prices. • Each price reflects the good’s value to buyers and the cost of producing the good. • Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. Market example • Market for parking spaces in New York • iSpotSwap • Milton Friedman • http://www.youtube.com/watch?v=4ERbC7JyCfU