MICROECONOMICS:

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MICROECONOMICS

• Rebecca Tuttle Baldwin
• Spring 2003
• An Introduction

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What is economics about?

• Study of CHOICES
• Economics is a social science

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http//www.etla.fi/pkm/JokEc.html

• Economics is the painful elaboration of the
  obvious. 
• An economist is someone who doesn't know what
  he's talking about - and make you feel it's your
  fault. 
• Economists are people who are too smart for
  their own good and not smart enough for anyone
  else's.

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Microeconomics

• Focus on individual economic agents
• Applied in market setting
• Goods
• Factors
• Consumer, producer, and government

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The Market

• Can be but need not be a physical interaction
• Arrangement through which buyers and sellers
  carry out exchange

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Why do we want to exchange?
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Premise

• Unlimited wants (no bliss point)
• Limited resources/time (scarcity)
• Hence choices have to be made

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Resources/Inputs/Factors of Products

• Land (raw, unimproved with inherent natural
  resources) RENT
• Labor WAGE
• CAPITAL (intermediate goods used in production)
  INTEREST
• Entrepreneur/Risk-taker PROFIT

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Perspective/Analysis

• Normative (value, judgment, hard to test)
• Positive (objective, relates links or
  cause/effect, can be verified or tested)
• Robert J. BARRO in his 1989 paper in the Journal
  of Economic Perspectives "A colleague of mine
  argues that a 'normative' model should be defined
  as a model that fits the data badly."

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Opportunity Cost

• Fundamental concept
• Value of the foregone alternative
• Can only arise in a world where available
  resources are limited so all wants cannot be
  satisfiedclearly, if resources were limitless,
  no action would be taken at expense of other and
  value of next best would be 0!

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Economics Operates on the Margin

• Actions are done in increments
• Choice tends to be decided on the change or
  addition in cost and benefits
• Sunk costs costs that cannot be recoveredhence
  have no bearing on decision (Life can only be
  understood backwards, but it must be lived
  forwards. -Kierkegaard )

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Models (story)

• By definition, a simplification of the real
  world
• Part art, part science
• Objective function (goal), variables (players),
  equations (relationships)
• All models are wrong but some are useful.
  -George Box

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Partial Analysis

• Hold some actions outside of the focus of the
  analysis
• ceteris paribus
• Holding all else equal, nothing else changing

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Common errors in our reasoning

• Post Hoc fallacy. Just because one event follows
  after a first event, doesnt mean the first
  caused it
• Correlation doesnt prove causation
• Fallacy of composition

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Adam Smith, 1700s

• Inquiry into the Wealth of Nations
• invisible hand
• Market forces, government forces
• Command, market, mixed
• Capitalism, socialism, communism
• Whats best.benchmarks
• Efficiency, equity, growth, stability