Microeconomics: Understanding Economic Decisions and Trade-offs - Prof. Mark Owens, Study notes of Microeconomics

Download Microeconomics: Understanding Economic Decisions and Trade-offs - Prof. Mark Owens and more Study notes Microeconomics in PDF only on Docsity! 1 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls 2 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls CHAPTER 1 Economics: Foundations and Models Fernando Quijano Prepared by: Bill Gates, chairman of Microsoft, testified before Congress in 2008 that limiting the number of foreign technical workers allowed into the United States was resulting in a “critical shortage of scientific talent.” 5 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls Examples of Microeconomic Decisions • (Individual) How many hours should I study tonight and how many should I sleep? • (Individual) Should I start working after I finish college or should I get my MBA? • (Household) How many children should I have? Should they go to a public or private school? • (Entrepreneur) How long should I keep my hot dog cart open on Tuesday night? Should I hire an employee or do it myself? • (Firm) Should the company sell computers and printers or just computers? Should the company develop a tablet computer to compete with the iPad? All of these decisions involve trade-offs between different options. 6 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls Trade-offs and Scarcity Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service. Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants. An individual can also face a trade-off between two choices. But why? • Scarce resources include time, money, and natural resources. • Scarcity essentially occurs with everything, everywhere, at all time. 7 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls Trade-offs and Scarcity • No matter who you are, you have to give up certain choices for other choices. • Individuals/families/firms/governments always have to choose between things that they may want to do • If each of us had an endless supply of time and resources, we could do anything and everything we wanted • But we don’t. • Since we don’t, we consider the what we give up to be the opportunity cost of our choice Opportunity cost: the highest-value alternative that must be given up to engage in an activity What would you rather be doing than reading this? 10 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls 2. People Respond to Economic Incentives Incentive: anything that motivates or encourages a particular choice Economic incentives motivate people to do what they may not do otherwise. 11 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls 3. Optimal Decisions are Made at the Margin • Marginal means “additional” or “extra” in the context of economics Marginal benefit: extra benefit you receive from an additional unit of something Marginal cost: extra cost you receive from an additional unit or something Optimal economic decisions are made such that the marginal benefit equals the marginal cost Understand the role of models in economic analysis. 1.3 LEARNING OBJECTIVE 12 of 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e. C h a p te r 1 : E c o n o m ic s : F o u n d a ti o n s a n d M o d e ls Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Microeconomics and Macroeconomics Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. Distinguish between microeconomics and macroeconomics. 1.4 LEARNING OBJECTIVE