microeconomics, by dr. malcolm rutherford

8/14/2019 Microeconomics, By Dr. Malcolm Rutherford

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ECON 103

Microeconomics

Dr. Malcolm Rutherford

Office: BEC 340

Office hours: Monday and

Thursday 2:30-3:30 or by

appointment. Office phone: 721-6481

E-mail: [email protected]


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Econ 103

Microeconomics

Text

Web sites

Help Centre

Study guide exercises

Outline

Exams

Grading

Other policies, rules, and

regulations


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Economics

Economics is about the economy

The way in which individuals and

social groups make a living

Provides the material well being ofindividuals and society

Economics can be defined in terms

of subject matter or in terms of

techniqueschoice in the face ofscarcity

Techniques of economic analysis

sometimes applied to non-economic

subject matter


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Economic Systems

What goods and services to

produce How to produce them

technology, specialization, and

teams Where and when to produce

them

How to distribute themwhogets how much?


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Economic Systems

The economy and society

The economy and technology

The Economy and the natural

world

EconomySociety

Nature

Technology


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Economic Systems

Traditional Economies

Hunting and gathering societies Command Economies

Ancient Egypt, Ancient China,

Soviet Union

Market Economies

The growth of market economies

in Europe

Mixed EconomiesThe variable place of

government


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The Market Economy

Production and distribution resultlargely from individuals pursuingtheir own self interest, in theinstitutional context of markets

Specialization and exchange Decentralized

Complex and interdependent

How does this complex anddecentralized system work, ratherthan becoming chaotic?

Markets provide information andincentives (prices, profits) and

coordinate economic decisions Microeconomics and

Macroeconomics


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Basic Concepts:

Scarcity

Limited resourcesland,

labour, capital, andentrepreneurship

Unlimited wants

Scarcity of resources relative towants

Need for choice betweenalternative uses of resources

This leads to the next importantconcept: cost


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Basic Concepts:

Opportunity Costs

Cost derives from scarcity and

the need to make choices The cost of doing one thing is

what is foregone

Explicit costs and implicit costs

The economists and the

accountants definition of cost

The implicit cost of capital and

economic profit


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Basic Concepts:

Decisions at the Margin

Some decisions involve all or

nothing choices Many decisions involve

decisions at the margin

How much of something shouldI consume or produce?

Marginal cost and marginal

benefit Optimal point where MC=MB


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Decisions at the Margin

Optimal rounds of golf per week

for Dr. R.

Q

$

Q*

MC

MB


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Basic Concepts:

Allocative Efficiency

Allocative efficiency is where

resources are allocated to theirhighest valued use

Marginal benefit=Marginal cost

At the margin people value thisgood (in terms of willingness toforego other things) just what itcosts to produce (in terms ofopportunity costs)

Allcosts and benefits must beincluded


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Efficient Use of

Resources

MC

MB

Q of good X

Cost exceeds benefitsBenefit exceedscost

What must be

foregone for an

additional unit

What people

will forego for

an additionalunit

Q*

$


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Basic Concepts:

Incentives

People tend to respond to

economic incentives Price changes

Opportunities to increase

income or reduce debts Changes in incentives vs moral

suasion

Unintended consequences andincentives


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Basic Concepts of

Interaction

There are gains from

specialization and trade Markets tend to equilibrium

(most of the time)

Markets tend to lead toeconomically efficient

outcomes (most of the time)

Government intervention cancorrect market failures


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Some Basic Models:

Production Possibilities

Production possibility curve

gives a simplified representationof an economy

Two goods

Given resources and technology Can use this model to think

about opportunity cost and

concepts of efficiency


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Production Possibility

FrontierWith given resources and

technology

Quantity

of

Militarygoods

Quantity of Civilian

goods

Attainable

Unattainable

PPF


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Opportunity Cost

Productive efficiencyon the

PPF Tradeoffs along the frontier

Opportunity cost

Constant opportunity cost

Increasing opportunity cost

Allocative efficiencywhere

on the PPF?


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Economic Growth

Economic growth can be represented as an

outward shift in the PPF due to

accumulation of capital or technological

change

X

Y


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Some Basic Models:

Gains from Trade

Without trade a person or nation islimited to their own domestic

production possibilities curve Gains from trade Absolute advantagebased on

different costs

Comparative advantagebased ondifferent relative costs

An example of two individuals withdifferent abilities or endowmentsand two activitieshunting for meator collecting plants and berrieseach with constant marginalopportunity costs


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Gains from Trade

Meat (kgs)

Plants (kgs)

Person 1

Person 2

10

20

10 Plants (kgs)

20

1 kg meat costs 2 kgs plants

1 kg plants costs .5 kg meat

1 kg meat costs .5 kg plants

1 kg plants costs 2 kgs meat

Meat (kgs)

Absolute Advantage


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Gains from Trade

Plants (Kgs)2010

10

20

a

b

b

c Person 1s ppf

Person 2s ppf

Trade line

Meat (kgs)

The trade line drawn here assumes terms

of trade of 1:1 and equal division of the

gains from trade


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Gains from Trade

Comparative AdvantageMeat

Plants

Meat

Plants

40

30

10

20

1M=1.33P

1M=0.5P

Person 1

Person 2


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Gains From Trade

Comparative Advantage

Assume trade at 1P=1M

30

40

20

10

30

10

10

P

P

M

M

Person 1produces 40P and

trades 10

Person 2 produces

20 M and trades 10


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Some Basic Models:

Circular FlowCircular Flow Diagram

Goods marketsFactor markets

Households

Firms

sales revenues

expenditures

incomes

Factor

payments

factors

inputs

goods

outputs


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The Market Economy Individual and households choose

what factors to supply for incomeand what goods to spend that income

on Firms choose what goods to produce

and what factors to buy in order toproduce them

Interdependence Choice and constraints on choice

Incentives

Markets and efficiency

Market failures

microeconomics, by dr. malcolm rutherford

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