ECON 103 Microeconomics

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ECON 103 Microeconomics

• Dr. Malcolm Rutherford
• Office BEC 340
• Office hours Tuesday 1130-1230 and Wednesday
  1230-130, or by appointment.
• Office phone [phone]
• E-mail rutherfo_at_uvic.ca

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Econ 103 Microeconomics

• Text
• Web sites
• Labs
• Help Centre
• Study guide exercises
• Outline
• Exams
• Grading
• Other policies, rules, and regulations

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Part 1Basic Concepts and Models

• Interest in economic problems
• But specific problems and issues change over time
• General analytic frameworkhow to think about any
  economic problem
• Abstraction and model building
• Simplified models that capture key general
  characteristics
• Empirical testing of models
• Economics and policy
• Positive and normative

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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 of individuals
  and society
• Economics can also be defined in terms of
  techniquechoice in the face of scarcity
• Techniques of economic analysis sometimes applied
  to non-economic subject matter

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The Market Economy

• Production and distribution result largely from
  individuals pursuing their own self interest, in
  the institutional context of markets
• Specialization and exchange
• Decentralized
• Complex and interdependent
• How does this complex and decentralized system
  work, rather than becoming chaotic?
• Markets provide information and incentives
  (prices, profits) and coordinate economic
  decisions

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The Market Economy

• Markets allocate resources BUT
• Markets and the distribution of income
• Markets and market power
• Markets in everything?
• Constraints on market activity
• Misbehaving markets?
• Market failures
• Government and markets

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Basic ConceptsScarcity

• Limited resourcesland, labour, capital, and
  entrepreneurship
• Unlimited wants
• Scarcity of resources relative to wants
• Need for choice between alternative uses of
  resources
• This leads to the next important concept 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 ConceptsDecisions at the Margin

• Some decisions involve all or nothing choices
• Many decisions involve decisions at the margin
• How much of something should I consume or
  produce?
• Marginal cost and marginal benefit
• Optimal point where MCMB

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Decisions at the Margin

• Optimal rounds of golf per week for Dr. R.

MC
MB
Q
Q
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Basic ConceptsEfficiency

• Productive efficiencyproduction at least cost
• Allocative efficiency is where resources are
  allocated to their highest valued use
• Marginal benefitMarginal cost
• At the margin people value this good (in terms of
  willingness to forego other things) just what it
  costs to produce (in terms of opportunity costs)
• All costs and benefits must be included

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Efficient Use of Resources
What must be foregone for an additional unit
What people will forego for an additional unit

MC
Benefit exceeds cost
Cost exceeds benefits
MB
Q
Q of good X
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Basic ConceptsIncentives

• People tend to respond to economic incentives
• Price changes
• Opportunities to increase income or reduce debts
• Changes in incentives vs moral suasion
• Incentives in the longer term
• Unintended consequences and incentives

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Some Basic ModelsProduction Possibilities

• Production possibility curve gives a simplified
  representation of 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 Frontier

• With given resources and technology

Unattainable
Quantity of Military goods
PPF
Attainable
Quantity of Civilian goods
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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

Y
X
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Some Basic ModelsGains from Trade

• Without trade a person or nation is limited to
  their own domestic production possibilities curve
• Gains from trade
• Absolute advantagebased on different costs
• Comparative advantagebased on different relative
  costs
• An example of two individuals with different
  abilities or endowments and two
  activitieshunting for meat or collecting plants
  and berrieseach with constant marginal
  opportunity costs

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Gains from Trade
Absolute Advantage
Meat (kgs)
Person 1
1 kg meat costs 2 kgs plants 1 kg plants costs .5
kg meat
10
Plants (kgs)
20
Meat (kgs)
20
Person 2
1 kg meat costs .5 kg plants 1 kg plants costs 2
kgs meat
10
Plants (kgs)
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Gains from Trade
Meat (kgs)
Person 2s ppf
b
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Trade line
c
10
Person 1s ppf
a
b
20
10
Plants (Kgs)
The trade line drawn here assumes terms of trade
of 11 and equal division of the gains from trade
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Gains from Trade

• Comparative Advantage

Meat
Person 1
30
1M1.33P
Plants
40
Meat
Person 2
20
1M0.5P
Plants
10
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Gains From Trade

• Comparative Advantage

Assume trade at 1P1M
M
30
Person 1 produces 40P and trades 10
10
P
40
30
M
Person 2 produces 20 M and trades 10
20
10
P
10
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Some Basic Models Circular Flow

• Circular Flow Diagram

expenditures
incomes
Households
factors
goods
Goods markets
Factor markets
inputs
outputs
Firms
Factor payments
sales revenues
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The Market Economy

• Individual and households choose what factors to
  supply for income and what goods to spend that
  income on
• Firms choose what goods to produce and what
  factors to buy in order to produce them
• Interdependence
• Choice and constraints on choice
• Incentives
• Markets and efficiency
• Market failures