Econ 2113: Principles of Microeconomics. Spring 2009 ECU

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1 Econ 2113: Principles of Microeconomics Spring 2009 ECU

2 Two Big Economic Questions Two big questions summarize the scope of economics: 1. How society determines what, how, and for whom goods and services get produced? 2. When do choices made in the pursuit of self-interest also promote the social interest?

3 Two Big Economic Questions 1. What, How, and For Whom? Goods and services are the objects that people value and produce to satisfy human wants. What? What we produce changes over time. Seventy years ago, almost 25 percent of Americans worked on farms. Today that number is 3 percent. Seventy years ago, 45 percent of Americans produced services. Today, almost 80 percent of Americans have service jobs.

5 How? Two Big Economic Questions Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: o Land o Labor o Capital o Entrepreneurship

6 Two Big Economic Questions The work time and work effort that people devote to producing goods and services is labor The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience The tools, instruments, machines, buildings, and other constructions that are used to produce goods and services are physical capital The human resource that organizes land, labor, and capital is entrepreneurship.

8 Two Big Economic Questions For Whom? Who gets the goods and services depends on the incomes that people earn. Land earns rent. Labor earns wages. Capital earns interest. Entrepreneurship earns profit.

9 Two Big Economic Questions 2. When Is the Pursuit of Self-Interest in the Social Interest? Every day, 6.6 billion people make economic choices that result in What, How, and For Whom goods and services get produced. Do we produce the right things in the right quantities? Do we use our factors of production in the best way? Do the goods and services go to those who benefit most from them?

10 Two Big Economic Questions You make choices that are in your selfinterest choices that you think are best for you Choices that are best for society as a whole are said to be in the social interest. Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest?

11 Two Big Economic Questions Adam Smith: When individuals take actions that pursue their own self interest, they often also achieve the society s interest Markets are the mechanism trough which actions taken on individuals self interest translate into socially desirable actions

12 Two Big Economic Questions Markets, trough prices, transmit information When members of society desire a good or service, they bid the price of it up That higher price encourages individuals, acting in their own interest, to provide those goods or services Then by pursuing their self interest they also pursue society s interest The market transmits information and aligns individuals and society s goals

13 Economics: A Social Science Economics is a social science. Economists distinguish between two types of statement: What is positive statements What ought to be normative statements A positive statement can be tested by checking it against facts. A normative statement cannot be tested, it is a value judgment In this course we are interested mainly in Positive Economics

14 Brief Math Review Before we go on into economic models, it will be useful to review a few math concepts that will be used later on This material is in the appendix to chapter 1 You should read that appendix

15 Graphing Data A graph reveals a relationship among variables A graph represents quantity as a distance. A two-variable graph uses two perpendicular scale lines. The vertical line is the y-axis. The horizontal line is the x-axis. The zero point in common to both axes is the origin.

17 Graphs Used in Economic Models Variables That Move in the Same Direction A relationship between two variables that move in the same direction is called a positive relationship or a direct relationship. A line that slopes upward shows a positive relationship. A relationship shown by a straight line is called a linear relationship. The three graphs on the next slide show positive relationships.

18 Graphs Used in Economic Models

19 Graphs Used in Economic Models Variables That Move in Opposite Directions A relationship between two variables that move in opposite directions is called a negative relationship or an inverse relationship. A line that slopes downward shows a negative relationship. The three graphs on the next slide show negative relationships

20 Graphs Used in Economic Models

21 Graphs Used in Economic Models Variables That Have a Maximum or a Minimum The two graphs on the next slide show relationships that have a maximum and a minimum. These relationships are positive over part of their range and negative over the other part.

24 Graphs Used in Economic Models Variables That are Unrelated Sometimes, we want to emphasize that two variables are unrelated. The two graphs on the next slide show examples of variables that are unrelated.

27 The Slope of a Relationship The slope of a relationship is the change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x- axis. We use the Greek letter Δ (capital delta) to represent change in. So Δy means the change in the value of the variable measured on the y-axis and Δx means the change in the value of the variable measured on the x-axis. The slope of the relationship is Δy/Δx. Intuitively, the slope represent the rate of change in y per unit of change in x

28 The Slope of a Relationship The Slope of a Straight Line The slope of a straight line is constant. Graphically, the slope is calculated as the rise over the run. The slope is positive if the line is upward sloping. The slope is negative if the line is downward sloping.

31 The Slope of a Relationship The Slope of a Curved Line The slope of a curved line at a point varies depending on where along the curve it is calculated Slope at a Point The slope of a curved line at a point is equal to the slope of a straight line that is the tangent to that point. Here, we calculate the slope of the curve at point A:

33 Linear Equations and Graphs A straight line can be represented by an equation The general form of a linear equation is y = a + b x The graph of a linear equation is a straight line In this equation, a represents the intercept of the graph of the equation, that is, the point at which the graph intersects the vertical axis b represents the slope of the graph The horizontal intercept can be computed easily, and it is equal to (a/b)

34 Linear Equations and Graphs y a (a/b) x

35 Example: Demand function P = 100 2Q Price Quantity

36 Linear Equations and Graphs P 100 Demand: P = 100 2Q Q

Chapter 1. Introduction: What Is Economics? Macroeconomics: Principles, Applications, and Tools NINTH EDITION

Chapter 1. Introduction: What Is Economics? Macroeconomics: Principles, Applications, and Tools NINTH EDITION Macroeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 1 Introduction: What Is Economics? Economics is the science of choice, exploring the choices made by individuals and organizations.