Principles Of Microeconomics Notes
Principles Of Microeconomics Notes Econ 22060-002
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This 5 page Class Notes was uploaded by Jacquelyn McGee on Wednesday January 27, 2016. The Class Notes belongs to Econ 22060-002 at Kent State University taught by Jeremiah Harris in Spring 2016. Since its upload, it has received 101 views. For similar materials see Microeconomics in Economcs at Kent State University.
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Date Created: 01/27/16
Micro Economics 1/25/16-1/27/16 What is economics? The study of how agents (individuals, firms, governments) make choices, interact and respond to incentives Economics: social science that studies the choices made by individuals, businesses, governments, and entire societies. As we cope with scarcity and the incentives that influence our choices and reconcile them. 2 branches o Microeconomics- studying the choices of a single agent o Macroeconomics- the study of the bigger picture 2 Key agents Agents for scarcity o Available resources are insufficient to satisfy wants Agents are rational o They act in some way to achieve their goals. Scenario There is a water scarcity during a marathon so how do we decide who gets the water? o By need o First come first serve o Set a price o Based on a characteristic o Random o Share o Competition o Auction Some terms can be defined in many different ways but the different ways can be equally valid o Positive statements- are factual statements with no opinion attached o Normative statement- a statement that is a judgment based on how things should be (opinion) o Fair is a normative word/statement What are the incentives of a “by need” system? o Act as if you need it if you want it even though you may not need it as much as others What are incentives of a lottery? o You may or may not get it o Bring your own What are the incentives of price? o Try to bargain o Bring your own o Ignore the water Scenario #2 Organ transplants o Kidney donation is a mixed of by need and first come first serve Why don’t we use a price mechanism? Positive analysis can help us reach normative conclusions o But our normative conclusion are always based on our own values and goals The effects of incentives and scarcity Scarcity: is when available are resources are limited and cannot sufficiently satisfy the wants; meaning we have to make choices Incentives: are rewards that encourages actions or a penalty that discourages an action; Benefits>cost/benefits<cost How Economist Think In addition to explicit cost, we also consider the opportunity cost or implicit cost Explicit cost: monetary cost Implicit cost: Value of forgone alternative Opportunity Cost: The net value of the next best alternative Sunk cost: costs that are made in the past and cannot be recovered or irreversible costs Sunk cost Fallacy: Idea that one is more willing to continue with an initiative if they had already invested a lot, even if continuing is not best. Economic resources Land/ natural resource: the gifts of nature that we use to produce goods and services. Labor: the work, time, and effort that people devote to producing goods and performing services; Human capital Capital: The tools, instruments, machines, buildings, and other constructions that a business/businesses use to produce goods and services; Capital is not money! Entrepreneurship: the human resource that organizes land, labor, and capital. Marginal Benefit: the benefit (cost) of an increase in an activity, the next unit Two types of Decision: o Discrete: Buy if benefit> cost o Continuous: Multiple quantities, such as how many donuts do I eat? Is the next plate at the buffet really worth it? Buy if marginal benefit> Marginal cost The Economic Problem 1/27/16 Differing Specialties Consider the following problem: Brain surgeons BMW 335i needs an engine repair Two individuals could complete the repair o Brain surgeon could fix in 1 hour As surgeon makes $1000 an hour o Mechanic could fix in 4 hours As the mechanic makes $100 an hour o Who should make the repair? Mechanic because its less. Its $400 for the mechanic and $1000 for the surgeon. Advantages: Absolute advantage: Production of a certain good can be achieved in less time or more can be produced in the same time o Brain surgeon has the absolute advantage Brain surgeon time is 1 hour Mechanic time is 4 hour hours Comparative advantage o Mechanic has the comparative advantage Brain surgeon cost is $1000 Mechanic cost is $400(4*$100) Example: o Lester can produce 4 guns per hour or he can produce 12 pounds of butter in an hour o Alyee can produce 3 guns in an hour or 10 pounds of butter in an hour o Lester has the Absolute advantage in both the # of guns and the # of pound of butter; though only one is chosen butter or guns. 4 guns cost 12 units of butter; 1 gun cost 3 butter. This can be reversed to find the cost of the unit of butter (ie. 12 butter cost 4 guns; 1 gun costs 1/3 of a gun) o Aylee 3 guns costs 10 butter; 1 gun costs 10/3(3.333) butter. This can be reversed the same as lester but replacing the numbers with Alyee’s values. (ie. 10 butter costs 3 gun; 1 butter costs 3/10 or . 3 of a gun) o Lester will have the comparative advantage because he has the comparative advantage on guns because 3<3.333 o Aylee will have the comparative advantage on butter because .3<.333. Production Possibilities Frontier (PPF) To illustrate PPF, we focus on the two goods that can be produced at a time and hold the quantities of all other goods and services. We look at a model economy in which everything remains the same (ceteris paribus) except the two goods we’re considering. PPF Characteristics: o Slope of PPF: Slope=Δy/Δx= (rise/run) (change in the y over change in the x) o Negative slope because of scarcity(illustrates tradeoff) o Magnitude of slope=marginal cost of “x-axis” good o When comparing two PPF’s the one with the flatter slope has the comparative advantage for the “x-axis” good. PPF Efficiency o Production efficiency We achieve production efficiency if we cannot produce more of one good without producing less of some other good Points on the frontier are Types of Efficiency Productive efficiency o Producing at lowest cost Allocative efficiency o Using resources where they have highest value Producing beyond the PPF Without changes this is possible however; o Possible if the PPF has been shifted outward Shifts in the PPF Technological change Capital accumulation Population growth Change in productivity of labor
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