Lecture Principles of Microeconomics: Chapter 1 - James D. Miller

Chapter 1 - What is microeconomics? After reading this chapter, you should be able to answer the following questions: What is economics? What are key assumptions of economics? What is Production Possibility Frontier? What is opportunity cost? What is the difference between microeconomics and macroeconomics?

Chapter 1

What is Microeconomics?

Learning Objectives

• What is economics?

• What are key assumptions of economics?

• What is Production Possibility Frontier?

• What is opportunity cost?

• What is the difference between

microeconomics and macroeconomics?

What is Economics?

Economics is the study of human

behavior using math and statistics

Key Assumptions

• People are self-interested.

• People are rational.

• People have unlimited desires but limited

resources

Self-Interest

• Most human behavior is motivated by interest

self-• Self-interest is much more than greed

• It encompasses anything that makes the person happy, e.g children's welfare,

charity.

• Self-interested people most often take

actions that are in the best interests of

society

• Only sometimes, self-interested people

take actions that harm society as a whole, e.g creating pollution

Rational People

Are you rational?

• Rational people consider all

consequences of their actions

• Rational people take actions that promote their self-interest

• Rational people respond to incentives

cost of medical care.

• Indirect effect: Pharmaceutical companies spend less money on research and development of

new drugs.

Indirect Effects

By studying rational decisions, economics helps to forecast indirect effects of

proposed policies

Unlimited Desires vs Limited

Resources

• All people have unlimited desires but face limited resources, which means ‘scarcity’

• We cannot satisfy all our wants

• Economics studies how people use their limited resources to satisfy unlimited

wants

Tradeoffs

• We have to choose which wants to satisfy

• Scarcity forces tradeoffs

Production Possibility Frontier (PPF)

If a country produces

only computers and

TVs, using all their

million Televisions

Production Possibility Frontier (PPF)

• PPF is a line that shows

combinations of goods a

country can make using

all of its productive

resources.

• It shows tradeoffs a

country has to face.

• By moving from one point

to another on PPF, a

country has to give up

production of one good

million Computers

Production Possibility Frontier (PPF)

million Televisions C

D

Opportunity Cost

• Opportunity cost

= Best opportunity lost

= Value of the next best alternative given for the chosen action

Increasing Wealth

• Increase in wealth results from increase

in production

• Specialization = developing high skills by

concentrating on only one task

• High skills = more and better production.

Increasing Wealth

= Finding new improved

ways for production.

Increasing Wealth

= Voluntary exchange of goods, services,

money and resources.

for trade and specialization.

Do You Know?

• Do rational people ever make mistakes?

Yes Rational people unknowingly make mistakes but avoid the same mistakes in the future

• Why do we all face tradeoffs?

All of us have unlimited wants and limited resources so we have to choose some

Do You Know?

• Why might it be cheaper to hire someone

else to shovel your driveway than do it

yourself?

Opportunity cost

• How could we ever have too little pollution?

By giving up most of the goods and services

Summary

• Economics is the study of human behavior.

• Microeconomics studies choices of individuals

and businesses.

• Most human behavior is motivated by

self-interest.

• People face tradeoffs because of their limited

resources to satisfy unlimited wants.

• Specialization, innovations and markets increase wealth.