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# Lecture 1 09_25 econ200

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Date Created: 02/03/15

Econ 200 Principles of Microeconomics Instructor Melissa Knox knoxmuwedu Outline 09252014 1 What is economics Economic models Syllabus and administrative details Using graphs Tradeoffs in production 0199 What Is Economics PeOple make choices as they try to attain their goals Choices are necessary because we live in a world of scarcity Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants What Is Economics PeOple make choices as they try to attain their goals Choices are necessary because we live in a world of scarcity Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants Economics is the study of these choices Economists study these choices using economic models simplified versions of reality used to analyze realworld economic situations Typical Economics Questions We will learn how to answer questions like these How are the prices of goods and services determined Why does government control the prices of some goods and services and What are the effects of those controls Three Key Ideas Idea 1 PeOpIe Are Rational Rational Using all available information to achieve your goals Three Key Ideas Idea 1 PeOpIe Are Rational Rational Using all available information to achieve your goals Rational consumers and firms weigh the benefits and costs of each action and try to make the best decision possible Example Microsoft doesn t randomly choose the price of its Windows software it chooses the prices that it thinks will be most profitable Three Key Ideas Idea 2 People Respond to Economic Incentives Three Key Ideas Idea 2 People Respond to Economic Incentives Example Changes in several factors have resulted in increased obesity in Americans over the last couple of decades including Decreases in the price of fast food relative to healthful food Improved nonactive entertainment options Increased availability of health care and insurance protecting people against the consequences of their actions Three Key Ideas Idea 3 Optimal Decisions Are Made at the Margin Economists think about decisions in terms of the marginal cost and benefit MC and MB the additional cost or benefit associated with a small amount extra of some action Three Key Ideas Idea 3 Optimal Decisions Are Made at the Margin Economists think about decisions in terms of the marginal cost and benefit MC and MB the additional cost or benefit associated with a small amount extra of some action Example Should you watch an extra hour of TV or study instead What are the benefits of an extra hour of TV What are the costs ie the benefits of studying instead Comparing MC and MB is known as marginal analysis Economic Models Economists develop economic models to analyze realworld issues Building an economic model often follows these steps Decide on the assumptions to use in developing the model Formulate a testable hypothesis Use economic data to test the hypothesis Revise the model if it fails to explain the economic data well Retain the revised model to help answer similar economic questions in the future 914sz Important Features of Economic Models Assumptions and simplifications every model needs them in order to be useful Testability good models generate testable predictions which can be verified or disproven using data Economic variables something measurable that can have different values such as the incomes of doctors The Scientific Nature of Economics Economists try to mimic natural scientists by using the scientific method But economics is a social science studying the behavior of people is often tricky When analyzing human behavior we can perform Positive analysis the study of what is andor Normative analysis the study of what ought to be Economists generally perform positive analysis Ex Should Medical School Be Free Forecasts indicate a significant shortage of doctors especially primary care physicians by 2020 Would more people become primary care physicians if medical school were free And if so would it be worth the cost Economic models can find answers to the positive aspects of this debate Which of the following questions can be answered using normative economic reasoning a If the college offers free parking will more students drive to campus If the college provided more financial aid would more students go to college If the college hires better qualified instructors will more students attend Should the college charge lower tuition to smarter students Microeconomics anol Macroeconomics Microeconomics is the study of how households and firms make choices how they interact in markets and how the government attempts to influence their choices Macroeconomics is the study of the economy as a whole including tOpics such as inflation unemployment and economic growth Syllabus and Administrative Details Class website httpscanvasuweducourses914736 should be able to access MyEconLab from here Check website for Full syllabus all course announcements TA information daily reading assignments Check MyEconLab for Weekly homework assignments including one due tomorrow but I am making this optional Class recordings also available via panopto Syllabus and Administrative Details Class website httpscanvasuweducourses914736 should be able to access MyEconLab from here For MyEconLab register for course id knox66508 If you have already registered for a different course id we are in the process of getting you moved to the right class please wait to be moved before attempting HW1 Syllabus and Administrative Details Syllabus details Homework 20 due every Monday 1159 pm Writing Assignments 9 3 assignments Class Participation 5 Midterm Exams 66 2 noncumulative no final Syllabus and Administrative Details Homework Do onine in MyEconLab Due every Monday at 1159 pm based on work from previous week Extra assignments due Friday September 26 tomorrow and Wednesday December 3 No late assignments but lowest score will be dropped Get three chances score is an average of the three Syllabus and Administrative Details Exams Two noncumulative exams 1028 and 1204 No final exam No graphing calculators or iphones please purchase or borrow a simple calculator Syllabus and Administrative Details Class Participation We will do inclass exercises beginning 0930 Please bring device smart phone tablet laptop to every class see me if this is an issue Please sign up for Learning Catalytics and sign in during every class Can miss 18 and still receive perfect grade no makeups Syllabus and Administrative Details Academic Integrity Academic integrity is the cornerstone of the Departments rules for student conduct and evaluation of student learning Students accused of academic misconduct will be referred directly to the Office of Community Standards and Student Conduct for disciplinary action pursuant to the Student Conduct Code and if found guilty will be subject to sanctions Sanctions range from a disciplinary warning to academic probation to immediate dismissal for the Department and the University depending on the seriousness of the misconduct Dismissal can be and has been applied even for first offenses Moreover a grade of zero can be assigned by the instructor for the course Syllabus and Administrative Details Academic Integrity No graphing calculators or internetcapable devices during exams All notes and books put away during exams better yet leave them at home No hats No bathroom breaks All of my exams are closed notes and closed neighbor Syllabus and Administrative Details Courtesy It is distracting to me and to your fellow students when you are online or texting during class Please keep your devices off unless we are doing an exercise or you are taking notes And I encourage you to take notes by hand studies show you learn better that way For this reason I will not put power point notes online until after class Syllabus and Administrative Details Add codes Please attend the section you wish to enroll in to obtain an add code from the TA Add codes are given at their discretion only Once you have a code for the section email me and I will give you a code for the class Graphs of Two Variables Price urtitgr The figure shows a two dimensional grid on which we measure the price of pizza 1 3 along the vertical axis or y 3 axis and the quantity of pizza m sold per week along the alf l i E horizontal axis or XaXiS i4 Each point on the grid represents one Of the price and ttttttt at a nnnnnnnnnnnnnnnnnnnnnnn H nnnnnnnnnnnnn M quantity combinations listed in the table E a pizzas quotper week BY 00 n GCti n 9 th e mi is With a 213345 532 49 al i253322JESSE5hn 112 h 3 1 3 I i ne i e numbers l omp lrom 0 to 50 and onthge vertical axis numbers lump irom 0 ton relationship between the two variables MEI lmi Calculating the Slope of a Line We can caCuate the Prim 315 slope of a line as the pgfgiE 15 change in the value of the variable on the y axis divided by the change in the value of l 5 5 5 5 the variable on the X H EUWE axis i it t i i i so in is Bnguse the SIOpe Of a Calculating the Slope of a Line lili a straight line IS constant we can use any tWO Slope Change in value on the vertical aXis Rise points in the figure to calculate the slope of the line l l39 Change in value on the horizontal aXis Ax Run Calculating the Slope of a Line continued For example when the price of pizza decreases from 14 to 12 the quantity of pizza demanded increases from 55 per week to 65 per week F 1 1 1 1 dollars per pizza 15 14 i mgzlvtli i g g g 113 1 14 2 Fa r u 55 1 110 T 5 5 5 Epu we It l l l l l I so 55 so as m 1 5 Calculating the Slope of a Line Quantity pizzai per WEEK Change in value on the vertical axis Ay Rise Slope Change in value on the horizontal axis Ax Run Slope APrice of pizza 2 12 14 2 2 2 02 AQuantlty of pizza 65 55 10 Showing Three Variables on a Graph The demand curve for pizza shows the Guamwmiwm re I O n S h I p FEWEquot Whenthe Frice f dollars perpigazaj Hamburgers 5150 between the price 15 so 111 55 Of pizzas and the 13 so 12 as quantity of pizzas 11 m demanded holding m m constant other factors that might willingness of consumers to buy 1 p39ZZa 1E a a i L g g l3 d5 EU 55 El 3513 T55 BIZ trirititrgii Showing Three Variables on a Graph inimsnerweetct Showing Three Variables on a Graph part B If the price of 4 uantty ipizzasperweeir A an increase in mm Wigwamu Wampum dbl Iars perpi aj Hamburgers 31 t Hamburgers E the priCe Of 15 ED 55 1d 55 hamburgers from 13 an as 12 55 ET 1t0 11 ru quot5 increases the m 15 quantity of pizzas 15 demanded from point B and Demand curve 13 up i i g I3 5 5E 55 ED 3513 T55 BE uaniiiy ip izza 5 per week Showing Three Variables on a Graph Showing Three Variables on a Graph part C Or if we start on Demand curve1 and the price of pizza is 12 point C a decrease in the price of hamburgers from 150 to 100 decreases the quantity of pizza demanded from 65 to 60 per week point D and shifts us to Demand curve3 Qua ntty pizzas per week Price When the Price 1313 Whantha Frl a f Wh ntha Firing lf de Iars per piazaj IIamburge rs 1 Ham burgers 3150 Hamburgers Eit110 1 5 501 55 1 at 55 60 ED 55 a asses E 3 E 3 E E 3 E 3 E a 3 E 3 E j 3 E 3 3 E 3 E 3 E 3 E j E E E E E liar pizza 15 r 1 z i E H 1 I quot 1 a 5 I I Demand g emand gemarjrj 10 E cuwea curvei E iuw a a g i g I3 5 5E 55 ED 3513 T55 BE entity tpizza 5 per WEEij Showing Three Variables on a Graph Positive and Negative Relationships In a positive relationship between two economic variables as one variable increases the other variable also increases In a negative relationship as one variable increases the other decreases This figure shows the positive relationship between disposable personal income and consumption spending E slumilcl n 51 1533 spending utensils Willi rms of Year 2 E l 31111 BETTIE Consumption Spending billions of dollars Disposable Personal income billions of dollars il ETEE 9345 tl11E male 11 1329 111931 39il 11251 1 131 152 1 liliil 953 act a re ll illlfllil quotI llquot 1 ll i l l 213quot 125 l i p asalblle personal in ame billions t antlers Graphing the Positive Relationship Between Income and Consumption Correlation vs Causation llallum her of Rate at lieElma rll39ll which E grass grow 4 Hum her all ii39EE 39339 NH f ih i fir lawn mature in ipflats rum rig iLll E l at Fi EllE fi of i39il litl i l variabls rib Problem of rain2 causality Using graphs to draw conclusions about cause and effect is dangerous For example in panel a as the number of fires in fireplaces increases the number of leaves on trees falls but the fires don t causetheleavestofaH In panel b as the number of lawn mowers being used increases so does the rate at which grass grows Are Graphs of Economic Relationships Always Straight Lines The relationship between two variables is linear when it can be represented by a straight line Few economic relationships are actually linear However linear approximations are simpler to use and are often good enough in modeling Slopes of Nonlinear Curves A nonlinear curve has Tiltltygi millinsa 1t39 different slopes at different points This curve shows the total cost of production for various quantities of iPhoneS at We can approximate its slope over a section by measuring the slope as if that section were linear Between C and D the L r t r slope is greater than quot mm mm A aJ ThE slope oil snonlinearculweiisnotconstant A 7 say the curve is steeper between C and D than between A and B Slopes of Nonlinear Curves continued Another way to measure the slope of a nonlinear curve is mt to measure the slope of a line that is tangent to the point where we want to know the SIOpe tau 35H 235 z ACOSt n K4 a produced 1 bit 39l39lhe i l ta noiirirea nurture is millilifinz mm ACOSt 150 The Slope of a Nonlinear Curve 150 AQuantity 1 Formula for a Percentage Change One important formula is the percentage change which is the change in some economic variable usually from one period to the next expressed as a percentage Value in the second period Value in the first period X 100 Percent age change 2 O Value 1n the f1rstperlod The Area of a Rectangle The area of a rectangle is equal to its base multiplied Area of arectanglc Basex Height by its height total revenue V gt is equal to quantity 1 multiplied by price Here total revenue is equal to the quantity of 125000 230 bottles times the price of 39 200 per bottle or 250000 Demand puma fur Pepsi 0 1 25 000 Quantity battles per month Showing a Firm s Total Revenue on a Graph The Area of a Triangle The area of the blue39Shaded triangle Area of a triangle 2 leasexHeight has a base equal to 2 150000 125000 or 25000 and a dollars height equal to mama 200 150 or 050 rea We in baae in height We tt 250003 5 6250 at 15i E 4142E Therefore its area 2 equals 12 x 25000 x 0r quot 13503quot l Quantity battles per munitth The Area of a Triangle Refer to the graph below What is the absolute value of the slope of this line PrisEa 15 ours quot H pier pi aj 15 f v 2 11 H H H H H 1 H H H H a H 1 H H39 gL s H H i quot e titanti ff i urre i 5 SE El E5 7quot 7395 iuantfty Five pizzas er week One fifth One There is insufficient information to compute the slope of this line 90699 Refer to the figure below What can be said about the value of the slope of this curve Pints 5 i exam 2 24 n 31 2 a a Study time hours a The value of the slope is greater between points iand j than between points g and h b The value of the slope is greater between points g and h than between points i and j C The value of the slope is the same between any two points along the curve ol It is difficult to establish the value of the slope because the relationship is not linear Production Possibilities Frontier Chapter 2 Section1 Households firms and governments continually face decisions about how best to use their scarce resources Scarcity requires tradeoffs Economics teaches us tools to help make good tradeoffs Production Possibilities Frontier Chapter 2 Section1 Households firms and governments continually face decisions about how best to use their scarce resources Scarcity requires tradeoffs Economics teaches us tools to help make good tradeoffs A production possibilities frontier PPF is a curve showing the maximum attainable combinations of two products that may be purchases with available resources and current technology A Production Possibilities Frontier for Tesla Testa39s Productlon Choices at Its Fremont Ptant Te S I a n p U S a n S Choice Quantity ot Sedans Produced Quantity of SUVs Produced andor SUVs A 8 C 40 40 If it wants to produce more 2 23 23 sedans it must reduce the WW number of SUVS 933321 ll lFl Eli air n mmbinatinn that I r is unattainable witih quot current resources Points on the PPF are attainable for Tesla j Tesla s production J possibilities frontier E is showing its tradeon if between producing sedans and SUVs Points below the curve I 39 are an Z w g p r E w J E an t 1 M LI quotn Points above the curve g are unattainable with a 1 i Diarrin Akcnmbinlinn thallis H EFMEEd p dmF inef cient became nnt all resnurses are being used Tesla s production possibilities frontier Tesla Can Trade Off Sedans for SUVs Tesla39s Productlon Choices at Its Fremont Plant TO p d U 2 O m 0 S U Choice Quantity of Sedans Produced Quantity of SUVs Produced eg moving from A to B 2 23 23 Tesla must produce 20 3 22 23 fewer sedans urrtity 1i sedans 39 pmdumd H The 20 fewer sedans IS is unattainable whit entrant resumes th e Tesla39s production T an i3 5 zmgtfii fg 39i39n SUVs between producing 39 sedans and SUVs C t A C an r LI t 11 Opportunity cost The g a highestvalued alternative f that must be given UP t0 engage in an activity Tesla s production possibilities frontier Increasing Marginal Opportunity Costs On the previous slide opportunity costs were lnereeeing euternelzrile prdluetirr by Eli here Tenke i COnStant elrtltyr redueee terrlr pruetien by Elli all 39 f lnereeeing eutemeeile But Opportunty costs are 4m ff getl predeetien try El here often Increasrng 3555 K E x n r redueeetenk preduetierr ley tee Why Some resources are eee better suited to one task than another The first resources to SWltCh are the one beSt iii Alutmelziilee suited to switching Increasing marginal opportunity costs The more resources already devoted to an activity the smaller the payoff to devoting additional resources to that activity Economic Growth on the PPF As more economic resources become available the economy can move from point A to point B producing more tanks and more automobiles stirs stat EDIE Shifts in the production possibilities frontier represent economic growth Iii inla l Al lill E l I325 Aut i i l l i l H Emitting slut thitE Ipsssitiistisiri issssilsilitiiss lirsiritisr Economic growth Economic growth the ability of the economy to increase the production of goods and services Technological Change in One Industry This panel shows technological improvement in the automobile industry The quantity of tanks that can be produced remains unChanged a an Era Aummaihiiles be nghn gllugiilcal glharng rg in the Eutgm bilg ilrl u lliw As in the previous slide many previously unattainable combinations are now attainable Economic growth EX A PPF for Exam Grades Suppose you have a limited amount of time to study for two exams Economics and Accounting What would the production possibilities curve for the exam grades look like EX A PPF for Exam Grades Suppose you have a limited amount of time to study for two exams Economics and Accounting What would the production possibilities curve for the exam grades look like Would it be a straight line or a curved one Why EX A PPF for Exam Grades Suppose you have a limited amount of time to study for two exams Economics and Accounting What would the production possibilities curve for the exam grades look like Would it be a straight line or a curved one Why Curved since the marginal benefit of studying a topic for an extra hour decreases in the number of hours spend studying that topic Refer to the graph below Which of the following combinations is unattainable with the current resources available in this economy Quantity of Roadsters emuem per Day t tilt 2E Jim 53 tit i2uar r ritgr cf 3qu Prouluceul Fill Day Combination G Combination F Combinations A or E All of the above None of the combinations above can be attained with current resources 90699 Refer to the graph below Which graph best represents an increase in the economy s resources aircraft aircraft arriers arriara 13 1 1 L u my 1 1 i L A d 4 4522 rest 3 E 3 Autnrrtplailas autpmcibiles The graph on the left The graph on the right Both graphs Neither graph 90693

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