class: middle, title-slide # Principles of Microeconomics ## The Big Ideas ### Dennis A. V. Dittrich ### 2022 --- layout: true <div class="my-footer"> <span><img src="img/tcb-logo.png" height="40px"></span> </div> --- # What Economics Is .row[.col-7[ > ``Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.'' > > _Lionel Robins, 1932, An Essay on the Nature & Significance of Economic Science_ ] .col-5[ Economics is a social science There is overlap with psychology, sociology, political science Economists ask different questions and use different methods to answer their questions ] ] .row[.col-7[ Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanism, social customs, and political realities of the society ] .col-5[The three central coordination problems any economy must solve: 1. .light-blue[What, and how much, to produce] 2. .light-blue[How to produce it] 3. .light-blue[For whom to produce it] ] ] --- ## Scarcity .row[.col-6[ **...and individual choice** * Due to scarce time & financial resources we constantly need to choose between two or more alternatives **...and society** * Scarcity means the goods available are too few to satisfy all individuals' desires * Scarcity exists because individuals want more than can be produced ] .col-6[ * There is a scarcity of resources * Labor * Capital * Land * Entrepreneurship * The degree of scarcity is constantly changing * The quantity of goods, services and usable resources depends on technology and human action ]] --- ## Microeconomics and Macroeconomics Economic theory is divided into two parts .row[.col-6[ **Microeconomics** is the study of individual choice, and how that choice is influenced by economic forces Microeconomics studies such things as: * The pricing policy of firms * Household's decisions on what to buy * How markets allocate resources among alternative ends ] .col-6[ **Macroeconomics** is the study of the economy as a whole Macroeconomics studies such things as: * Inflation * Unemployment * Economic growth ]] --- ## Topics in Microeconomics .row[.col-6[ **Consumers** * Limited income * How do consumers decide between consumption and saving? **Employees** * Entering the labour market (professional world) or getting more training? * Decision regarding the type of work and the workplace * Working Hours ] .col-6[ **Firms** * Which products should be produced? **Prices** * The role of prices in a market economy * Employees make decisions based on their Wages * companies make decisions based on Wages and input prices ]] --- # Positive and Normative analysis .row[ .col-6[ The **positive analysis** uses theories and models to predict the consequences of a decision / change: 'What if ...?' * How does a quota on imports for foreign cars will impact on the sales of domestic cars? * What would be the effects of an increase in the gasoline tax? ] .col-6[ The **normative analysis** is devoted to questions concerning 'what ought to be?' * Should the government reduce the tax for diesel vehicles with particulate filters? * Should the government tax the consumption of fossil fuels more? ]] .row[.col-7[ The **Art of economics** is using the knowledge of positive economics to achieve the goals determined in normative economics ]] --- # Methods of Economists: Theory and Models .col-7[ Theories are used to formulate observed phenomena based on rules and assumptions. * Theory of the Firm * Consumption Theory Models are (mathematical) representations of a theory. * simplified, abstract representation of the real world * some characteristics may have been left out * As simple as possible but not simpler. ] --- # Theory and Models ### Assumptions and Conclusions .col-7[ **Simplifying assumptions** facilitate the analysis without influence the conclusions derived from a model. **Critical Assumptions** influence the conclusions derived from a model. ] ### The development of the theory .col-7[ The review and improvement of the theories is central to the development of economics as a science. ] ### The confirmation of a theory .col-7[ The validity of a theory is determined by the quality of their predictions given the assumptions. ] --- ## Systems to organize economic activity: History and Economic Systems **Tradition** **Command**: Central Planning **Markets**: The Price System --- class: middle # Big Ideas in Economics --- .your-turn[ .col-7[ Who is more likely to work long hours in a laboratory researching new cures for diseases? 1. a scientist who earns a percentage of the profits from any new medicine she might invent, or 2. a scientist who will get a handshake and a thank you note from her boss if she invents a new medicine? ]] --- # 1. Incentives Matter .row[.col-7[ **rewards** and **penalties** motivate behavior. * People respond to incentives in predictable ways. * Self-interest is an important incentive in economics. ]] --- # 2. Good Institutions Align Self-Interest with the Social Interest .col-7[ * Markets magically align your self-interest with social interest (usually) * "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." ] --- # 3. Trade-offs Are Everywhere .center[![](img/college.png)] --- # Opportunity Cost .row[ .col-6[ * Opportunity cost is the benefit forgone of the next-best alternative to the activity you have chosen * Opportunity cost should always be less than the benefit of what you have chosen * Opportunity cost is the basis of cost/benefit economic reasoning ] .col-6[ Examples of opportunity cost: **Individual decisions** * The opportunity cost of college includes: * Items you could have purchased with the money spent for tuition and books * Loss of the income from a full-time job **Government decisions** * The opportunity cost of money spent on the war on terrorism is less spending on health care or education ]] --- .your-turn[ .col-7[ What would happen if the punishment for lesser crimes is increased (say, mandatory execution for drug dealers)? ] ] --- # 4. Thinking on the Margin .row[ .col-7[ Actual trade-offs are usually __on the margin.__ **Marginal** means additional Most economic **choices** are marginal choices ]] ### Marginal costs and marginal benefits .row[.col-6[ Using economic reasoning, decisions are often made by comparing marginal costs and marginal benefits * **Marginal cost** is the additional cost over and above costs already incurred * **Marginal benefit** is the additional benefit above and beyond what has already accrued ] .col-6[ The economic decision rule: * If the marginal benefits of doing something exceed the marginal costs, do it. **MB > MC `\(\Rightarrow\)` Do it!** * If the marginal costs of doing something exceed the marginal benefits, don't do it. **MB < MC `\(\Rightarrow\)` Don't it!** ]] --- # 5. The Power of Trade .center[ <iframe width="802" height="451" src="https://www.youtube.com/embed/jbkSRLYSojo" frameborder="0" allow="accelerometer; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> https://youtu.be/jbkSRLYSojo ] --- ## 6. The Importance of Wealth & Economic Growth .row[ .col-3[ Wealth brings higher standards of living: Wealth and Health go together] .col-9[ <img src="img/gdpsurvival.png" width="100%" style="display: block; margin: auto;" /> ]] --- ## Why are some countries rich and others poor? .center[![](img/wealth.png)] --- # Everyone Used to be Poor ![](img/gdptrend.png) --- # 7. Institutions Matter Incentives are sometimes lacking. Strong institutions that support these incentives foster economic growth. ![](img/korea.jpg) --- # Economic Institutions .col-7[ * To apply economic theory to reality, you've got to have a sense of economic institutions * Economic institutions are laws, common practices, and organizations in a society that affect the economy * Economic institutions differ significantly among nations * They sometimes seem to operate differently than economic theory predicts ] --- # Growth-Compatible Institutions .row[.col-6[ * Property rights * Informal property rights limit borrowing by the poor, and hence limit growth * When individuals get much of the gains of growth themselves, they work harder * Competitive and open markets * Markets and private ownership of property foster economic growth * Corporations are growth-compatible institutions because of limited liability, which gives stockholders an incentive to invest their savings in large enterprises ] .col-6[ * Honest Government * A dependable legal system * Political stability ]] --- ## 8. Economic Booms and Busts Cannot Be Avoided but Can Be Moderated .col-7[ Policymakers use **Fiscal** Policy and **Monetary** Policy to attempt to smooth out economic volatility. ] --- .your-turn[ .col-7[ Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called **money** and handing those out to its citizens? ]] --- ## 9. Prices Rise When the Government Prints Too Much Money .col-7[ * Inflation is an increase in the general level of prices. * Heavily indebted nations often print money to pay down debt. ] --- # 10. Central Banking & Economic Policy Making Is a Hard Job .col-7[ * Helping the economy be stable * Balancing inflation and unemployment * Preventing banking crises? ]