ECN 202: Principles of Microeconomics - Spring 2024

Chapter 1: Economics: Foundations and Models

Key Concepts

• Economics: Study of choices in the face of scarcity.
• Scarcity: Unlimited wants exceed limited resources.
• Economic Models: Simplified versions of reality to analyze economic situations.

Chapter Outline

1. Three Key Economic Ideas
2. The Economic Problem That Every Society Must Solve
3. Economic Models
4. Microeconomics vs. Macroeconomics
5. Economic Skills and Careers
6. Important Economic Terms

Three Key Economic Ideas

1. People Are Rational: Consumers and firms use all available information to make decisions.
   • Example: Pricing strategies by Apple.
2. People Respond to Economic Incentives: Changes in incentives lead to changes in behavior.
   • Example: DNA submission reducing crime.
3. Optimal Decisions Are Made at the Margin: Decisions involve marginal costs and benefits.
   • Example: Choosing between more TV or more study time.

The Economic Problem That Every Society Must Solve

• Questions: What, how, and for whom to produce?
• Trade-offs: Due to limited resources, producing more of one good reduces the production of another.
  • Opportunity Cost: The value of the next best alternative foregone.

Production Decisions

• Goods and Services Produced: Choices by individuals, firms, and governments.
• Production Methods: Different methods for producing goods/services.
  • Example: Music production techniques.
• Distribution of Goods: Income distribution affects who receives goods and services.

Types of Economies

• Centrally Planned Economy: Government allocates resources.
• Market Economy: Resources allocated through market interactions.
• Mixed Economy: Combination of market and government roles.

Market Caveats

• Efficiency may not always be achieved.
• Equity: Fair distribution of benefits; trade-offs between equity and efficiency.

Economic Models

• Building Models:

  1. Decide on assumptions.
  2. Formulate testable hypotheses.
  3. Test using economic data.
  4. Revise models based on data.

• Assumptions: Simplifications about consumer and firm behavior.

Hypotheses and Testing

• Economic Variables: Measurable factors such as employment rates.
• Positive vs. Normative Analysis:
  • Positive: What is.
  • Normative: What ought to be.

Microeconomics vs. Macroeconomics

• Microeconomics: Decisions by households and firms.
• Macroeconomics: Overall economy, including inflation and growth.

Economic Skills and Careers

• Applications in Careers:
  • Various roles in companies, financial institutions, and government agencies.
  • Examples include forecasting demand or analyzing policy impacts.

Important Economic Terms

• Technology: Processes for producing goods and services.
• Capital: Manufactured goods used for production.

Using Graphs and Formulas

• Graphs: Simplified models to understand economic situations.
• Formulas: Calculations and their interpretations in economic contexts.
• Percentage Change Formula: Useful for gauging economic changes over time.

Graphical Analysis

• Bar Graphs and Pie Charts: Visualize market share data.
• Time-Series Graphs: Show trends over time.
• Price and Quantity Graphs: Analyzing demand relationships.
• Positive Relationships: Understanding how variables like income and consumption relate.

Calculating and Interpreting

• Slope Calculation: Understanding changes in variables.
• Revenue and Area Calculations: Visual representations of economic data.