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Principles of Microeconomics- Lecture #1

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Joshua Hill

on 25 May 2015

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Transcript of Principles of Microeconomics- Lecture #1

Economics and Human Behavior
Lecture #1
What is Economics?
What is Economics?
Micro vs. Macro
How do economists
study the economy?
"Study of the allocation of scarce means to satisfy competing needs." (Gary Becker)
How do humans behave when they must make decisions under constraints?
Fundamental Economic Question
How do I/ the company/ society allocate scarce resources to unlimited wants?

What trade-offs do I face? Examples?
Who gets the Ferrari and who gets the Yugo?
Do we make our own food or trade for it?
Who produces what?
How do we improve everyone's well being?
Is there any policy that would increase income?
How do we generate revenue for services?
What car should I buy?
How much should I work for?
How do I best allocate my income across my family?
What price should I charge?
What wage should I pay this employe?
When do I shutdown
1. Observation
Problems Specific to Econ.
2. Theory
3. Test
Scientific Method
How do we study such a complex thing?
Obviously, as a society we don't all get together in a huge stadium and decide these things. It is done through mechanisms, mainly markets, that result in certain outcomes.
Economists observe some phenomenon, for example:
Wages are different for certain workers.
Some people make riskier decisions than others.
One firm sets different prices than another
We aren't just interested in what happens, we want to know why it happens.
Economists have to abstract from reality because reality is too complicated.
Isolate certain aspect of human behavior and hold everything else constant.
Typically very mathematically intensive.
We will only utilize the most basic models in this course that only require basic mathematics skills.
Basics of Modeling
Test Theory to see if it can be accepted or rejected.
Can't just accept a theory at face value.
A theory may seem to explain a phenomenon, but until it can be verified it needs to be taken for what it is.
Not really possible in economics for a theory to evolve into a law.
In the hard sciences, researchers conduct experiments to test theories.

Economists do not usually have this option, so how do we actually test a theory?
Why are experiments difficult?
Impossible and unethical to conduct experiments in macroeconomics and some areas of microeconomics
Randomly assign some people with a college education?
Randomly assign a country with a certain policy?
Possible in some areas of microeconomics:
Isolate behavioral or psychological factors in decision making.
Importance of Data
Economists utilize intensive data analysis in an attempt to accept or reject certain theories.
Known as econometrics
Allows economists to identify causal links between two variables.
Done on the micro and macro level
As with all science, it offers evidence not proof.
Natural experiments
In this course...
We will focus on making intelligent observations utilizing economic models to better understand human behavior.

To do this, we must make some simplifying assumption.
Three basic assumptions
1. People are Rational
We have to assume that people follow some decision making process.

Interested in the AVERAGE individual, not a specific person.

How we define "rationality" is important.
2. Incentives matter
Individuals and firms consistently respond to incentives.


Unintentional Consequences
3. Decision are made at the Margin.
Optimal decisions are always made at the margin
Marginal--one extra

Interested in the cost or benefit of one extra good
Marginal Benefit and Marginal Cost
Next Class:
Markets and Trade
What are markets?
How can trade make everyone better off?
Comparative and Absolute Advantage
Economic is not:
The study of
Economics is...
Opportunity Costs
Because of trade-offs, the cost of an option must include opportunity costs.
opportunity cost: The highest valued alternative that must be given up to engage in an activity.
The cost of A must include the benefit you would have received from B
The idea of opportunity costs are vital to studying economics.
“No such thing as a free lunch”
What will we discuss in this class?
What markets are and how they work.
Different types of markets.
How to analyze human behavior in a market.
How to critically analyze economic actions.
Full transcript