Principles of Microeconomics

1. Principles of Microeconomics Professor Norbert Wilson Tuesdays and Thursdays 12:30-1:45 p.m. Hood Auditorium, Comer Hall

2. Scarcity True story, in the spring of 1996, a 19-year-old college sophomore, who had just finished taking introductory economics, was faced with a choice: to continue college for an additional two years or to devote full time to a job. The job was being a professional golfer on the pro tour—a job for which the sophomore was uniquely qualified, having won three U. S. amateur titles. Doing both college and the pro tour was not an option because time is scarce: With only 24 hours in the day, he simply did not have time to do both.

3. For this sophomore, completing college had a great cost: not only the two years of college expenses, but also the foregone tournament winnings and advertising endorsements (over $40 million) that a successful pro golf career would bring. The golfer—his name is Tiger Woods—made a choice. He became a pro. By the fall of 1996 he was selected Sportsman of the Year by Sports Illustrated, and in April 1997 he stunned the golfing world with a record-setting win of the venerable Masters Tournament—winning nearly half a million dollars (Taylor, p. 5). • Why did Tiger have to choose? • Did Tiger give up something by going on the pro tour?

4. Coordination 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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. [Man is] led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was part of it. By pursuing his own he frequently promotes that of the society more effectually than when he really intends to promote it (Adam Smith, 1776).

5. What is Economics? • Economics is the study of ______________ _____________________________________________________________________ • Scarcity of goods and resources means that___ ______________________________________ ______________________________________ • Opportunity cost is the___________________ ______________________________________

6. Scarcity • Since we live in a society with scarce resources, we must discover __________ _________________________________ • The way market economies, such as ours, _________________________________ • Ideally, it is through ___________ for scarce goods and services that our economy obtains a level of efficiency.

7. Scarcity: We Need Efficiency • Efficiency denotes ___________________ _______________________________________ _______________________________________. • More specifically, the economy is producing efficiently when_____________ ___________________________________ ___________________________________.

8. Efficiency • An efficient economy through competition determines three questions • _____________? • _____________? • _____________?

9. The Three Questions • The What is a question of _______. • _______ are the various useful goods or services that result from the production process and are either consumed or employed in further production

10. The Three Questions • The How is a question of ______. • ______ are commodities or services used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs. • Factors of production • ____—natural resources: land, energy, water • _____—human time spent in production, etc. • _______—durable goods: computers, cows, etc.

11. The Three Questions • The For Whom is a question of _________. • _________ may be final users of the good or service. Additionally, consumers may be those who purchase the goods and services to convert into another good or service. The consumption of the goods or services for the production of another is called the______________________ ______________________________________.

12. Alternative Production Possibilities Possibilities Butter (millions of pounds) Guns (thousands) A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0 Production Possibility Frontier

13. Production Possibility Frontier • _________________________ occur when producing more of one good requires giving up producing an increasing amount of another good.

14. A B C I D Impossible U E Inefficient F Production Possibility Frontier

15. Production Possibility Frontier • The ________________________________shows the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quantity of inputs available. • _____________________ occurs when society cannot increase the output of one good without cutting back on another. The society is on the PPF.

16. Production Possibility Frontier • _________________ is an upward trend in real GDP, reflecting expansion in the economy overtime; it can be represented as an outward shift in the PPF. • Real gross domestic product (GDP) is a measure of the value of all the goods newly produced in a country during some period of time, adjusted for inflation.

17. The Science of Economics • January 1971 average cost of CA dairy quota was $201/lb. Snf in nominal terms. • The average change in the monthly S&P 500 from January 1970 to December 1998 was 1.12 percent. • The return of the 10-Year Treasury Security was 6.26 percent in January 1993. • August 1987, the round weight of processed catfish was 24.403 million pounds.

18. The Science of Economics • We in economics look at facts and observations, from the world around us, and make __________________________ of the observations. • But there are too many facts out there as I just showed you; thus, science uses ________ to help sort through the facts (Silberberg p.9).

19. The Science of Economics • A theory is a set of assertions or propositions considered universally true to ___________________________________ ___________________________________ (Silberberg, p. 9). • Ideally, theories should be fundamentally general and simple—but too much of a good thing can be baaaad.

20. The Science of Economics • A useful hypothesis is one that in principle can be wrong, that is if the hypothesis is a ____________________. • Like in other sciences, economics seeks to make statements and propositions that could, in principle, be ______ but turn out to be ____________________ (Silberberg, p.9).

21. The Science of Economics • In the physical and biological sciences, the researcher may observe a phenomenon in the environment and through _________________ tries to determine whether one event causes another event, but in economics, controlled experiments are rare. • However, a growing area in economics is called ______________________, a branch of economics that uses laboratory experiments to analyze economic behavior (Taylor, pp. 12-13).

22. Really, What is Economics?!? • Economics is a way of _______ and a way of ________________________________! • Economics is oriented ________________ __________________________________ __________________________________!

23. Really, What is Economics?!? • Economics is a science that helps us explain why some individuals are________________________ ________________________________________. • Economics entails accurately describing _______ ________________________________________ ________________________________________ _____________________________ (Taylor, p.5).

24. Really, What is Economics?!? • Microeconomics is the branch of economics which is concerned with the behavior _______________ ________________________________________. • Macroeconomics is concerned with the ________ ________________________________________. • Agricultural economics is a sub-branch of economics (mostly micro) that considers _______ ________________________________________ ________________________________________.

25. Really, What is Economics?!? • _______________ are ones where the vast majority of prices for goods and services are free to vary. • ___________________________________ are ones where the vast majority of prices for goods and services are determined by the central government (Taylor, p. 20).

26. Really, What is Economics?!? • The economist often tries to study the world from the perspective of what is or what will be which is called ____________________. • Others often ask the assistance of economists from the perspective of what should be which is called ______________ ___________________________________.

27. Really, What is Economics?!? Society must find the right balance between the ___________________ and the ______ ______________________. By using cool heads to inform our warm hearts, economic science can do its part in ensuring a prosperous and just society.

28. Markets: The Coordination of People with Scarce Resources • ___________________ are improvements in income, production or satisfaction owning to the exchange of goods and services. • ______________ is the situation in which a resource, such as labor, concentrates and develops efficiency at a particular task.

29. Markets: The Coordination of People with Scarce Resources • ________________ is the dissemination of production to various parts in which different groups of workers specialize. • ____________________ is a situation in which a person or country can produce one good more efficiently than another good in comparison with another or country.

30. Markets: The Coordination of People with Scarce Resources • ______________ is an elaborate mechanism for coordinating people, activities, and businesses through a system of prices and markets. • In a market economy, ___________________ ____________________ is responsible for production, consumption, distribution, and pricing.

31. Markets: The Coordination of People with Scarce Resources • A ______ is a MECHANISM by which buyers and sellers can determine prices and exchange goods and services. The crucial characteristics of a market is that it brings buyers and sellers together to set prices and quantities.

32. Markets: The Coordination of People with Scarce Resources • ______ coordinate the decision of producers and consumers in a market. Higher prices tend to reduce consumer purchases and encourage production. Low prices encourage consumption and discourage production. Prices are the ______ ________________________________________. • ________ __________ presents a balance among all the different buyers and sellers.

33. The Role of Government The “invisible hand” suggested by Adam Smith suggests that markets can work well with any intervention: prices coordinate producers and consumers in an exchange of goods and services, but, what happens when the invisible hand is hurt???

34. The Role of Government Well, when the invisible hand is hurt, the government steps in to • _________________, • _________________, and • ________________________________.

35. The Role of Government • Efficiency occurs under perfect competition. • __________________means that all goods and services have a price and are traded on markets. It also means that no firm or consumer is large enough to affect the market price, as seen in ______________________________.

36. The Role of Government • Deviations from efficiency occur with • __________________________________ (monopolies, oligopolies, etc.) are markets that a buyer(s) or seller(s) can affect a good’s price. • _________ (spillover effects: pollution and research benefits) occur when firms or people impose costs or benefits on others outside the market place. • ______ _____ (military, national parks) are commodities for which the cost of extending the service to an additional person is zero and which it is impossible to exclude individuals from enjoying typically funded by taxes.

37. The Role of Government • Equity • Markets do not necessarily produce ________ ___________________. A market economy may produce unacceptably high levels of inequality of income and consumption.

38. The Role of Government • Macroeconomic Growth and Stability • Macroeconomic policies for stabilization and economic growth include ______ _______ (of taxing and spending) along with _______ ________ (which affect interest rates and credit conditions).

39. Demand and Supply: Equilibrium The demand curve (or schedule)represents the _______________________ ___________________________________ ___________________________________ ___________________________________.

40. Demand and Supply: Equilibrium • The Law of downward-sloping demand • When the price of a commodity is raised (and other things are held constant), buyers tend to buy _________________. Similarly, when the price is lowered, other things being constant, _______________________.

41. Demand and Supply: Equilibrium • The Law of downward-sloping demand • Why does the quantity demanded fall as the price rises, or the converse, why does the quantity demanded rise as the price falls? • The _________ _____ and the _____ _____.

42. Demand and Supply: Equilibrium • The Law of downward-sloping demand • The substitution effect says that as a good becomes more expensive, consumers _______ _____________________________________. • The income effect is the idea that as the price of a good increase, _____________________ ________________. At lower income levels, consumers are not capable of buying ________ ________________ after the price increases.

43. Demand and Supply: Equilibrium • What’s behind the demand curve? • The prices of closely related goods. • Complementary goods are goods _____________ _______________ (e.g. hot dogs and hot dog buns). • Substitutes are goods _______________________ _____________________________ (e.g. apples and oranges) (Taylor, p. 59).

44. Demand and Supply: Equilibrium • What’s behind the demand curve? • The average income of consumers • For a ______ ____, as income increases, the demand for the good also increases (e.g. bread, movie, etc.). • For an ______ ____, as income increases, the demand for the good decreases (e.g. Ramen noodles, Vienna sausages).

45. Demand and Supply: Equilibrium • What’s behind the demand curve? • ______ ___ ___________ represent a variety of cultural and historical influences, which may reflect genuine psychological or physiological needs (e.g.consumption of sweet tea by Southerners and interest in SUVs). • ________________ __ ___ ______: The number of people who can consume a good affects the demand for the good (e.g. aging baby boomers and geriatric health care).

46. Demand and Supply: Equilibrium • What’s behind the demand curve? • ______ _________ encompass a broad category that reflects changes that can affect demand (e.g. the consumption of umbrellas in Seattle relative to Los Angles, expectations of future prices, etc.).

47. Demand and Supply: Equilibrium • Change in the quantity demanded is associated with a ____________________ ______________. • A change in demand is associated with __ ___________________________.

48. Supply and Demand : Equilibrium • The supply schedule (or supply curve) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things held constant (ceterius paribus).

49. Supply and Demand : Equilibrium • The ___ __ ______ isthe tendency for the quantity supplied of a good in a market to increase as its prices rises.

50. Supply and Demand : Equilibrium • The law of upward-sloping supply • Why does the quantity supplied fall as the price falls? Why does the quantity supplied rise as the price rises? • The upward sloping supply curve is, in part, the result of the “___ __ __________ _______.”