ISG microeconomics introduction

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ISG BBA PROGRAM Fall semester
ECO 200 MICROECONOMICS
LECTURE 1 INTRODUCTION
Wednesday, October 4th 2006
Dr. Guillaume Sarrat de Tramezaigues
www.gstblog.com
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Course Presentation

• - 10 cessions
• - 18 chapters
• - 1 dedicated website www.gstblog.com
• - Teaching method lecture, discussion and
  problem solving
• - 2 courseworks 1 participation mark 1 prep
• - 1 mid term exam
• 1 final exam
• 1 mandatory text book for both microeconomics
  and macroeconomics modules
• Economics, N. Gregory Mankiw and Mark P. Taylor
  Thomson 2006

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Course Presentation
Coursework 1 15 Coursework 2 15 Midterm
exam 20 Readings - preps 10 Participation 10
Final exam 30 100
The attendance is mandatory. You are responsible
for all the material covered in class as well as
announcements, whether you are present or not.
Readings and papers will be corrected at least
once per student.
Courseworks must be submitted at the beginning of
the class and no delay will be tolerated. If not
in class the day of submission, students can send
it by e-mail the previous day at midnight, last
deadline at guillaumesarrat_at_yahoo.fr
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Course content
1st cession Introduction Ten Principles of
economics Chapter 1 Thinking like an
economist 2nd cession Chapter 2
Interdependence and the gains from
trade Chapter 3 Supply and Demand I how
markets work
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Course content
3rd cession Coursework 1 10.18.2006 Chapter
4 Elasticity and its applications Chapter
5 Supply, Demand and government
policies 4th cession Chapter 6 Supply and
Demand II Chapter 7 Application the cost of
taxation
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Course content
5th cession Midterm exam 11.08.2006 Chapter
8 Application International Trade 6th
cession Chapter 9 The economics of the public
sector Chapter 10 Public goods and common
resource
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Course content
7th cession Chapter 11 The design of the tax
system Chapter 12 Firm behaviour and
the organisation of industry 8th
cession Coursework 2 11.29.2006 Chapter 13
Firms in competitive markets Chapter 14
Monopoly
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Course content
9th cession Chapter 15 Oligopoly Chapter
16 Monopolistic competition 10th
cession Chapter 17 The economics of labor
market Chapter 18 The theory of consumer
choice Final exam Week 01.08-13.2007
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Introduction Ten Principles of economics
From N. Gregory Mankiw, Microeconomics, Thomson
SouthWestern Third Edition 2006
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Economy. . .

• . . . The word economy comes from a Greek word
  for one who manages a household.

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Ten principles of economics

• A household and an economy face many decisions
• Who will work?
• What goods and how many of them should be
  produced?
• What resources should be used in production?
• At what price should the goods be sold?

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Ten principles of economics

• Society and Scarce Resources
• The management of societys resources is
  important because resources are scarce.
• Scarcity. . . means that society has limited
  resources and therefore cannot produce all the
  goods and services people wish to have.

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Ten principles of economics

• Economics is the study of how society manages its
  scarce resources.

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Ten principles of economics

• How people make decisions.
• People face tradeoffs.
• The cost of something is what you give up to get
  it.
• Rational people think at the margin.
• People respond to incentives.

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Ten principles of economics

• How people interact with each other.
• Trade can make everyone better off.
• Markets are usually a good way to organize
  economic activity.
• Governments can sometimes improve economic
  outcomes.

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Ten principles of economics

• The forces and trends that affect how the
  economy as a whole works.
• The standard of living depends on a countrys
  production.
• Prices rise when the government prints too much
  money.
• Society faces a short-run tradeoff between
  inflation and unemployment.

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Principle 1 People Face Tradeoffs.

• There is no such thing as a free lunch!

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Principle 1 People Face Tradeoffs.

• To get one thing, we usually have to give up
  another thing.
• Guns v. butter
• Food v. clothing
• Leisure time v. work
• Efficiency v. equity

Making decisions requires trading off one goal
against another.
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Principle 1 People Face Tradeoffs

• Efficiency v. Equity
• Efficiency means society gets the most that it
  can from its scarce resources.
• Equity means the benefits of those resources are
  distributed fairly among the members of society.

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Principle 2 The Cost of Something Is What You
Give Up to Get It.

• Decisions require comparing costs and benefits of
  alternatives.
• Whether to go to college or to work?
• Whether to study or go out on a date?
• Whether to go to class or sleep in?
• The opportunity cost of an item is what you give
  up to obtain that item.

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Principle 2 The Cost of Something Is What You
Give Up to Get It.

• LA Laker basketball star Kobe Bryant chose to
  skip college and go straight from high school to
  the pros where he has earned millions of dollars.

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Principle 3 Rational People Think at the Margin.

• Marginal changes are small, incremental
  adjustments to an existing plan of action.

People make decisions by comparing costs and
benefits at the margin.
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Principle 4 People Respond to Incentives.

• Marginal changes in costs or benefits motivate
  people to respond.
• The decision to choose one alternative over
  another occurs when that alternatives marginal
  benefits exceed its marginal costs!

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Principle 5 Trade Can Make Everyone Better Off.

• People gain from their ability to trade with one
  another.
• Competition results in gains from trading.
• Trade allows people to specialize in what they do
  best.

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Principle 6 Markets Are Usually a Good Way to
Organize Economic Activity.

• A market economy is an economy that allocates
  resources through the decentralized decisions of
  many firms and households as they interact in
  markets for goods and services.
• Households decide what to buy and who to work
  for.
• Firms decide who to hire and what to produce.

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Principle 6 Markets Are Usually a Good Way to
Organize Economic Activity.

• Adam Smith made the observation that households
  and firms interacting in markets act as if guided
  by an invisible hand.
• Because households and firms look at prices when
  deciding what to buy and sell, they unknowingly
  take into account the social costs of their
  actions.
• As a result, prices guide decision makers to
  reach outcomes that tend to maximize the welfare
  of society as a whole.

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Principle 7 Governments Can Sometimes Improve
Market Outcomes.

• Market failure occurs when the market fails to
  allocate resources efficiently.
• When the market fails (breaks down) government
  can intervene to promote efficiency and equity.

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Principle 7 Governments Can Sometimes Improve
Market Outcomes.

• Market failure may be caused by
• an externality, which is the impact of one person
  or firms actions on the well-being of a
  bystander.
• market power, which is the ability of a single
  person or firm to unduly influence market prices.

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Principle 8 The Standard of Living Depends on a
Countrys Production.

• Standard of living may be measured in different
  ways
• By comparing personal incomes.
• By comparing the total market value of a nations
  production.

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Principle 8 The Standard of Living Depends on a
Countrys Production.

• Almost all variations in living standards are
  explained by differences in countries
  productivities.
• Productivity is the amount of goods and services
  produced from a worker for a single hour

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Principle 8 The Standard of Living Depends on a
Countrys Production.

• Standard of living may be measured in different
  ways
• By comparing personal incomes.
• By comparing the total market value of a nations
  production.

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Principle 9 Prices Rise When the Government
Prints Too Much Money.

• Inflation is an increase in the overall level of
  prices in the economy.
• One cause of inflation is the growth in the
  quantity of money.
• When the government creates large quantities of
  money, the value of the money falls.

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Principle 10 Society Faces a Short-run Tradeoff
Between Inflation and Unemployment.

• The Phillips Curve illustrates the tradeoff
  between inflation and unemployment
• òInflation ð ñUnemployment
• Its called a short-run tradeoff

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Summary

• When individuals make decisions, they face
  tradeoffs among alternative goals.
• The cost of any action is measured in terms of
  foregone opportunities.
• Rational people make decisions by comparing
  marginal costs and marginal benefits.
• People change their behavior in response to the
  incentives they face.

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Summary

• Trade can be mutually beneficial.
• Markets are usually a good way of coordinating
  trade among people.
• Government can potentially improve market
  outcomes if there is some market failure or if
  the market outcome is inequitable.

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Summary

• Productivity is the ultimate source of living
  standards.
• Money growth is the ultimate source of inflation.
• Society faces a short-run tradeoff between
  inflation and unemployment.