Principles of Microeconomics:

Sections 8 & 9
Professor Charles Scott
Fall, 2013
Class One:
Fundamental Concepts

General Learning Goals for EC 102

By the end of the course students should be
able to:
1.Understand the basic economic concepts:

scarcity,
opportunity cost,
marginal analysis, and
comparative advantage

General Learning Goals for EC 102

Continued
2. Use the model of supply and demand to
analyze

How markets work

Why free markets benefit society
What factors affect economic outcomes and
how
How government actions affect the economy

General Learning Goals for EC 102

Continued
3. Understand the behavior of consumers & firms
How profits motivate firms
How price is determined & acts as a signal
How cost & revenue effect firms decisions
How market structure affects market
outcomes
MOST IMPORTANT
How all this affects each and every one of us

Content Plan for the Course

I. Basics of Economics
September
Thinking like an economist
Comparative Advantage: Reason for Trade
Supply and Demand
Price Responsiveness (Elasticity)
October 1 TEST 1

Content II:
More Detail for Simplest Case
October
Demand (what is behind the curve)
Competition & the Role of Cost
Market Efficiency: Competitive Markets
Monopoly & Other Forms of Markets
November 7 TEST 2

Content III: Adding Realism

November & December
Strategic Behavior
Why ownership matters:
-> Externalities and Property Rights
Public Goods
Economics of the Labor Market
December 11 EXAM (section 8) 1:00 PM
December 17 EXAM (section 9) 9:00 AM

Mechanics of the Course: Grading

Tests (2 @ 15% each)
Lessons Learned (4 @ 5% each)
Quizzes & Exercises @ 3-5% each

30%
20%
30%

(expect 6 to 10)

Final Exam @ 25%

20%
100%

Potential Extra Credit

One additional lessons learned (replaces lowest 5%)
Periodic talk write ups (up to 2% each)

Success Strategies
1.
2.
3.

Read the text material before class

Think about how the material applies to your life
Come to class
a)
b)
c)

4.
5.
6.
7.

Listen actively
Participate & Ask & Answer questions
Take Notes

Watch the news and practice applying the material

Keep up
Participate in question & answer sessions with fellow
students
Attend review sessions as needed

The Honor Code

All work turned in must be your own
Cite sources in Lessons Learned
Study for Tests & plan ahead so that you
are not tempted

The Honor Code protects the

value of your degree

Objectives for this week

At the end of this week, students should
1. understand the role of scarcity, choice
and opportunity cost.
2. understand the importance of marginal
analysis.
3. be able to construct and manipulate a
simple economics graph.
4. understand the need for abstract
models.
5. Know how this applies to you

General Concepts
Economics is abstract
This course mixes
Positive economic analysis (descriptive)
Normative economic analysis (prescriptive)

If it is not useful, we will not be talking

about it.
If you do not see relevance, ask

Examples are the key.

Why Economics?
Scarcity
Limited budget
Limited societal resources
Limited time

FORCES
Choice
Chicken OR hamburger at McDonalds
More roads OR more buildings
TV OR study

Which Leads to
Economics is the study of choices

What choices are made?

How we make them?
Why we make them?
Who benefits or is hurt?

Meaning for you: How can I make better decisions?

Consumer/Business/Work/Personal Life

Fundamental Concepts in Economics I

Opportunity Cost:
What is given up to get what we get (or do what we
do)
What is the next best alternative?
When I go to McDonalds, I use
Money
Time

What would I have done with the time and money

alternatively?
All of what I give up is the opportunity cost.

Notice that sometimes money is key, sometimes

something else is key (time, status, grades, energy, )

Opportunity Cost Examples

What do you give up in order to come to class?
________________________
To Loyola?
________________________
To College?
_______________________
What is the biggest cost of college?
_______________________

Fundamental Concepts in
Economics II
Cost/Benefit is method
We usually can see the benefit of a purchase
We often forget the cost
Economics is called the Dismal Science because it
points out that EVERYTHING has a cost
Rational decisions are based on careful assessment
of costs and benefits
Take only actions for which the benefit exceeds the cost

Example: Should I watch TV?

What are the benefits?
What are the costs?
Should I?

What other decisions can you apply cost/benefit to?

__________________________________________

Fundamental Concepts in
Economics III
Individual wellbeing is fundamental criterion
This is a characteristic of a Capitalist Society
In Socialistic or Communistic societies, the general good
has a higher priority than the individual wellbeing.
The contrast:
In Sweden, students are paid to go to college, but taxes on
income are much higher than here.
In the US, taxes are lower, but the services provided are fewer
and require payment (such as health care & education)
The choice between Republican and Democratic raises similar
distinctions-individual vs collective wellbeing

What would be the priority of a study team?

______________________________

Fundamental Concepts in
Economics IV
Self-interest is individual criterion
This need not mean selfish
My self-interest includes my preference for fairness to
others
If I take from you, you may later take from me

Individuals seek Economic Surplus

Willing to pay more than it costs

Example: How much is water worth?

Notice: Context matters

What have you bought for which you would have paid
more?
______________________________

Three Pitfalls
1. Measuring costs proportionally.
Which is a better discount?
Car
$15,000
0.33% off

Textbook
$150
33% off

Does the saving feel different? Why/why not?

What does the answer say about rationality?

Three Pitfalls
2. Ignoring Implicit Costs
Is it worth standing in line for concert tickets?

Should you go to opening day of a popular movie?

Should I rake my own leaves?

Three Pitfalls
3. Failure to think at the Margin
Is it worth studying? vs Should I study another
hour?

How do you choose which subjects to study when

time is limited?

Fundamental Concepts in
Economics IV
Marginal Cost &/or Benefit
One more/One less

Average Cost &/or Benefit

Total Cost/Number of Units

Examples
Studying?
Organization of Food in Cafeteria Lines
Pricing of cars/houses/cell phones/etc.

Scarcity
=>
Choice
=>
Cost/Benefit
Opportunity Cost
Information overload
=>

Economists use Models

Models use Abstract Logic (ignoring some details)

Fundamental Concepts in
Economics V
Positive
Statements of fact or relationship

Normative
Statements including obligation or opinion

Which is open to question?

Examples (Positive/Normative?)

Normative
You should study ___________
Positive
Higher Prices lead to fewer customers _______
Studying helps your grade__________
Positive
Normative
The minimum wage is too low_________
The minimum wage is not a living wage _________
Positive(?)

Fundamental Concepts in
Economics VI
Microeconomics
Small
Study of choice by Individuals, firms,
industries

Macroeconomics
Large
Economy and world-wide issues

Relevant Business Questions

How Much?
Most decisions
Must be answered first
Always a marginal question
Whether?
Always an average or total question

Use of Graphs

Pictorial Representation of Concepts

Brings concreteness to discussion
Learn to read them
Learn to construct them
Learn to manipulate them
If you have trouble, let me know and I will
do more background to clarify.

Class Graphing Exercise

Assume that you have two good
pencils you could use or sell and that
you use pencils regularly yourself to
take notes. (GROUP A)
OR
Assume that you have no pencils you
could use or sell and that you use
pencils regularly yourself to take notes.
(GROUP B)

Example (continued)
1. Choose the two prices listed below and
write them down.
The Minimum Price at which you would
be willing to sell one pencil (if you have a
pencil to sell) _______
The Maximum Price at which you are
willing to buy one pencil ________

I will call off prices and ask who wants to sell and then who
wants to buy.

2.Fill in the table below describing what happens in the class.

Price
$0.02
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
_____
_____

Supply
Demand
_______________
_____________
_______________
_____________
_______________
_____________
_______________
_____________
_______________
_____________
_______________
_____________
_______________
_____________
_______________
_____________
_______________
_____________

Would your answers and the outcome change if there was a test that day?