Chap1 - Introduction - Student Ver.

* Lecturer: Van, Cao Hai (MSc.) * Email: vanch@hvnh.edu.vn * Zalo: 0904.380.
277
MICROECONOMICS
Interactive PowerPoint Slides by:

V. Andreea Chiritescu
Eastern Illinois University
MICROECONOMICS
CHAPTER
INTRODUCTION
1
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MICROECONOMICS
PART
Ten Principles of
1 Economics
IN THIS PART
• What kinds of questions does economics
address?
• What are the principles of how people
make decisions?
• What are the principles of how people
interact?
• What are the principles of how the
economy as a whole works?
4
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Ten Principles of Economics
Resources are scarce
• Scarcity: the limited nature of society’s
resources
– Society has limited resources and cannot
produce all the goods and services people
wish to have.
• Economics (comes from Greek “oikonomos”
= “one who manages a household.)
• The study of how society manages its scarce
resources
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 5
Ten Principles of Economics
• Economists study:
– How people decide how much they work,
what they buy, how much they save, and
how they invest their savings
– How firms decide how much to produce and
how many workers to hire
– How society decides how to divide its
resources between national defense,
consumer goods, protecting the environment,
and other needs
3 main sections
1.How People Make Decisions

2.How People Interact
3.How the Economy as a Whole
Works
The principles of
HOW PEOPLE
MAKE DECISIONS
How People Make Decisions
Principle #1: People face trade-offs

Principle #2: The cost of something is what
you give up to get it
Principle #3: Rational people think at the
margin
Principle #4: People respond to incentives
Principle #1: People Face Trade-Offs
To get something that we like, we have to give
up something else that we also like.
– Going to a party the night before an exam
• Less time for studying
– Having more money to buy stuff
• Working longer hours, less time for leisure
– Protecting the environment
• Resources could be used to produce
consumer goods.
EXAMPLE: Society faces trade-offs
• Efficiency: Society gets the maximum benefits from its

scarce resources.
• Equality: Prosperity is distributed uniformly among
society’s members.
Trade-off:
– To achieve greater
equality, we could
redistribute income
from wealthy to poor.
– But this reduces
incentive to work and
produce, shrinking
the size of economic
“pie”.
11
EXAMPLE: Society faces trade-offs
• The more it spends on

national defense (guns) to
protect from foreign
aggressors
– The less it can spend on
consumer goods
(butter) to raise its
standard of living
• Pollution regulations:
cleaner environment and
improved health
– But at the cost of
reducing the well-being
of the firms’ owners,
workers, and customers
12
Principle #2: The Cost of Something Is What
You Give Up to Get It
• Making decisions:
– Compare costs with benefits of
alternatives
– Need to include opportunity costs
• Opportunity cost
– Of any time is whatever must be given up
to obtain it
– It is the relevant cost for decision making.
13
© 2021 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
®
EXAMPLE: Opportunity cost
• What is the opportunity cost of going to
college for a year?
• Tuition, books, and fees
• NOT: room and board
• PLUS foregone earnings
• What is the opportunity cost of going to the
movies?
• The price of the movie ticket
• PLUS the value of the time you spend in the
theater
14
Principle #3: Rational People Think at the Margin
• Rational people
– Systematically and purposefully do the
best they can to achieve their objectives
given the available opportunities
– Make decisions by evaluating costs and
benefits of marginal changes
• Small incremental adjustments to a plan of
action
Active Learning 1: Thinking at the margin
A. As the manager at the local Save-a-lot, you
are thinking of hiring one more cashier that
would increase sales revenues by $400 per
week. The new cashier would earn $300 per
week. Should you hire the new cashier? Why?
B. You pay $12/month for access to Netflix,

regardless of how many movies or TV shows
you watch in a month. Should you watch one
more movie (or episode)? Why?
16
Principle #4: People Respond to Incentives
• Incentive
– Something that induces a person to act
– Can have unintended consequences
• People respond to incentives
– Because rational people make decisions
by comparing costs and benefits
• An increase in the price of doughnuts:
– Consumers buy fewer doughnuts.
– Sellers produce more doughnuts.
EXAMPLE: Incentives
The government increases the gasoline tax by
$1 per gallon.
• How do consumers respond?
– Drive smaller or more fuel-efficient cars
– Carpool
– Use public transportation
– Move closer to work
• How do businesses respond?
18
Active Learning 2: Applying the principles
You are selling your black 1967 Chevy Impala.
You have already spent $2,000 on repairs. At the
last minute, the transmission dies. You can pay
$1,400 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you
have the transmission repaired? Explain.
A. Blue book value (what you could get for the car)
is $14,500 if transmission works, $11,200 if it
doesn’t.
B. Blue book value is $12,300 if transmission
works, $11,000 if it doesn’t.
19
Active Learning 2: Answers
Cost of fixing the transmission = $1,400
A. Blue book value is $14,500 if transmission works,
$11,200 if it doesn’t.
– Benefit of fixing transmission = $3,300
(= 14,500 – 11,200)
– Get the transmission fixed.
B. Blue book value is $12,300 if transmission works,
$11,000 if it doesn’t.
– Benefit of fixing the transmission = $1,300
(= 12,300 – 11,000)
– Do not pay $1,400 to fix it.
20
The principles of
HOW PEOPLE INTERACT
How People Interact
Principle #5: Trade can make everyone

better off.
Principle #6: Markets are usually a good
way to organize economic activity.
Principle #7: Governments can sometimes
improve market outcomes.
Principle #5: Trade Can Make Everyone Better Off
• People benefit from trade:

– Rather than being self-sufficient,
people can specialize in producing one good or
service and exchange it for other goods.
• Countries benefit from trade and
specialization:
– Get a better price abroad for goods they
produce
– Buy other goods more cheaply from abroad than
could be produced at home
Principle #6: Markets Are Usually a Good Way to
Organize Economic Activity – 1
• Market
– A group of buyers and sellers (need not
be in a single location)
• “Organize economic activity” means
determining
– What goods and services to produce
– How to produce these goods and services
– How to allocate them to their final user
• Market economy
– Allocates resources through the
decentralized decisions of many firms and
households as they interact in markets
– Proven remarkably successful in
organizing economic activity to promote
overall prosperity
• Prices:
– Determined by the interaction of buyers
and sellers
– Reflect the good’s value to buyers
– Reflect the cost of producing the good
• Adam Smith’s “invisible hand”:
– Prices guide self-interested households
and firms to make decisions that maximize
society’s economic well-being.
Principle #7: Governments Can Sometimes
Improve Market Outcomes – 1
• Government: enforce property rights

– Enforce rules and maintain institutions that
are key to a market economy
• People are less inclined to work, produce,
invest, or purchase if there is a large risk of
their property being stolen.
• We rely on government-provided police and
courts to enforce our rights over the things we
produce.
• Government: promote efficiency
– Avoid market failures: Market left on its
own fails to allocate resources efficiently.
– Externality – source of market failure
• Production or consumption of a good affects
bystanders (e.g. pollution).
– Market power – source of market failure
• A single buyer or seller has substantial
influence on market price (e.g., monopoly).
• Government: promote equality
– Avoid disparities in economic well-being
– Use tax or welfare policies to change how
the economic “pie” is divided.
• To say that the government can improve
market outcomes
– Does not mean that it always will
Active Learning 3: The government
In each of the following situations, what is the
government’s role?
Does the government’s intervention improve
the outcome?
A. Public schools for K-12
B. Workplace safety regulations
C. Public highways
D. Patent laws, which allow drug companies
to charge high prices for life-saving drugs
30
The principles of
HOW THE
ECONOMY
AS A WHOLE
WORKS
How the economy as a whole works
Principle #8: A country’s standard of living

depends on its ability to produce goods and
services.
Principle #9: Prices rise when the
government prints too much money.
Principle #10: Society faces a short-run
trade-off between inflation and
unemployment.
Principle #8: Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services – 1
• Huge variation in living standards across

countries and over time
– 2017 average income:
• $60,000 in the U.S.; $6,000 in Nigeria
– Average income in rich countries
• Is more than ten times average income in
poor countries
– The U.S. standard of living today
• Is about eight times greater than 100 years
ago
Principle #8: Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services – 2
• Productivity: most important determinant

of living standards
– Quantity of goods and services produced
from each unit of labor input
– Depends on the equipment, skills, and
technology available to workers
• Other factors (e.g., labor unions, competition
from abroad) have far less impact on living
standards.
Principle #9: Prices Rise When the Government
Prints Too Much Money
• Inflation
– An increase in the overall level of prices in
the economy
• In the long run
– Inflation is almost always caused by
excessive growth in the quantity of money,
which causes the value of money to fall
– The faster the government creates money,
the greater the inflation rate
Principle #10: Society Faces a Short-Run Trade-Off
between Inflation and Unemployment
• Short-run trade-off between inflation and
unemployment
– In the short-run, many economic policies
push inflation and unemployment in
opposite directions.
– Other factors can make this trade-off more
or less favorable, but the trade-off is
always present.
THINK-PAIR-SHARE
Your university decides to reduce the price of a
parking permit on campus from $250 per semester to
$10 per semester.
A. The number of students desiring to park their cars on
campus will _________.
B. The amount of time it would take to find a parking
place will ___________.
C. Will the lower price of a parking permit necessarily
lower the true cost of parking? (Hint: opportunity cost)
D. Would the opportunity cost of parking be the same
for students with no outside employment and
students with jobs earning $15 per hour?
CHAPTER IN A NUTSHELL
• Individual decision making:
• People face trade-offs among alternative goals.
• The cost of any action is measured in terms of
forgone opportunities.
• Rational people make decisions by comparing
marginal costs and marginal benefits.
• People change their behavior in response to the
incentives they face.
38
• Interactions among people:
• Trade and interdependence can be mutually
beneficial.
• Markets are usually a good way of coordinating
economic activity among people.
• Governments can potentially improve market
outcomes by remedying a market failure or by
promoting greater economic equality.
39
• The economy as a whole:
• Productivity is the ultimate source of living
standards.
• Growth in the quantity of money is the ultimate
source of inflation.
• Society faces a short-run trade-off between
inflation and unemployment.
40
MICROECONOMICS
PART
Thinking Like an
2 Economist
IN THIS PART
• What are economists’ two roles? How do they
differ?
• What are models? How do economists use them?
• What are the elements of the Circular-Flow
Diagram? What concepts does the diagram
illustrate?
• How is the Production Possibilities Frontier related
to opportunity cost? What other concepts does it
illustrate?
• What is the difference between microeconomics and
macroeconomics? Between positive and normative?
42
3 main sections
1.The Economist as Scientist
2.The Economist as Policy Adviser
3.Why Economists Disagree
43
The Economist as Scientist
The Economist as a Scientist – 1
• Economists play two roles:
1. Scientists: try to explain the world
2. Policy advisors: try to improve it
• As scientists, economists employ the
scientific method.
– Dispassionate development and testing of
theories about how the world works
– Devise theories, collect data, and analyze
these data to verify or refute their theories
• As scientists, economists employ the
scientific method: Observation, Theory, and More
Observation
- Dispassionate
development and testing
of theories about how
the world works;
- Devise theories, collect
data, and analyze these
data to verify or refute
their theories
• Economists make assumptions.
– Simplify the complex world and make it easier to
understand. For example, to study international
trade, assume only two countries producing two
goods.
– Ceteris paribus: literally "holding other things
constant”
• Economists use models to study economic issues.
– Simplified representation of a more complicated
reality
– Economists use models to study economic issues.
1ST model: The Circular-Flow Diagram
• Circular-flow diagram
– Visual model of the economy
– Shows how dollars flow through markets
among households and firms
• Two decision makers
– Firms and households
• Interacting in two markets
– Market for goods and services
– Market for factors of production (inputs)
The circular flow – 1
Households:
▪ Own the factors of production,
sell/rent them to firms for income
▪ Buy and consume goods and
services
Firms Households
Firms:
▪ Buy/hire factors of production,
use them to produce goods
and services
▪ Sell goods and services
49
Markets for
Goods and
Services
▪ Goods and services
are bought and sold.
▪ Sellers: firms
▪ Inputs are bought ▪ Buyers: households
and sold.
▪ Sellers: households
▪ Buyers: firms Markets for
Factors of
Production
50
Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
51
2nd model: The PPF
• Production possibilities frontier (PPF)
– A graph that shows various combinations
of outputs that the economy can possibly
produce, given the available factors of
production and the available production
technology.
EXAMPLE 1: The PPF
• Assume the following:
– A country produces only two goods: airplanes
and soybeans.
– It has a fixed amount of resources (labor).
– And it has a fixed amount and quality of
technology.
– The available resources and technology can be
used to produce:
• Only soybeans (5,000 tons)
• Only airplanes (100 airplanes)
• Or a combination of soybeans and airplanes
53
EXAMPLE 1: The PPF and output combinations
Airplanes Tons of Soybeans
A 0 5,000
B 20 4,000
C 50 2,500
D 80 1,000
E 100 0
• These are just a few of the possible production
combinations.
• To increase the production of airplanes from 0 to
20, how many tons of soybeans do we have to give
up?
54
EXAMPLE 1: Drawing the PPF
Airplanes
100 E
Airplanes Tons of D
Soybeans 80
A 0 5,000 C
50
B 20 4,000
C 50 2,500 B
20
D 80 1,000 A
E 100 0 0 1,000 2,500 4,000 5,000
Soybeans (tons)
• Efficient: the economy is getting all it can from the scarce
resources available – points on the PPF (A, B, C, D, E)
• Inefficient levels of production: points inside the PPF
• Not feasible: points outside the PPF
55
Active Learning: Points off the PPF
Use the graph from the previous example.
• Would it be possible for the economy to
produce the following combinations of the
two goods?
– Point F: 80 airplanes and 4,000 tons of
soybeans
– Point G: 30 airplanes and 2,500 tons of
soybeans
56
Active Learning: Answers
Airplanes
100 E
Point F (80 airplanes, D F
4,000 tons of 80
soybeans): Not C
possible 50
G
30 B
20
Point G (30 airplanes, A
2,500 tons of 0 1,000 2,500 4,000 5,000
soybeans): Possible Soybeans (tons)
but not efficient (can
produce more)
57
The PPF: What We Know So Far
• Points on the PPF (like A – E): efficient
– Efficient: all resources are fully utilized
• Points under the PPF (like G): possible
– Not efficient: some resources are
underutilized (e.g., workers unemployed,
factories idle)
• Points above the PPF (like F)
– Not possible
Moving Along the PPF
• Moving along a PPF
– Involves shifting resources from the
production of one good to the other
• Society faces a tradeoff.
– Getting more of one good requires
sacrificing some of the other.
• The slope of the PPF
– The opportunity cost of one good in terms
of the other
EXAMPLE 2: The PPF and opportunity cost
Airplanes
To produce the first
E
1,000 tons of
100 soybeans: give up 20
D
80
airplanes
C
• Opportunity cost of 1
50 airplane = ______
B
20
A • Opportunity cost of 1
0 1,000 2,500 4,000 5,000 ton of soybeans =
Soybeans (tons) _______
60
Economic growth and the PPF
Airplanes
• With additional
120
resources or an
Economic growth improvement in
100 shifts the PPF
outward. technology, the
80 economy can produce:
• more soybeans,
50
• more airplanes,
• or any combination
20
in between.
0 1,000 2,500 4,000 5,000 6,000
Soybeans (tons)
61
The Shape of the PPF
• Shape of the PPF
– Straight line: constant opportunity cost
• Previous example: the opportunity cost of 1
airplane is 50 tons of soybeans
– Bowed outward: increasing opportunity
cost
• As more units of a good are produced, we
need to give up increasing amounts of the
other good produced.
Why the PPF might be bowed outward – 1
• As the economy shifts

Beer
resources from beer to

mountain bikes:
• PPF becomes
steeper
• and the opportunity
cost of mountain
bikes increases.
Mountain
Bikes
63
Why the PPF might be bowed outward – 2
At A, opportunity cost of • At point A, most
Beer
A mountain bikes is low. workers are producing

beer, even those who
are better suited to
B building bikes.
At B, opportunity • At B, most workers

cost of mountain
bikes is high.
are producing bikes.
The few left in beer
Mountain
production are the
Bikes best brewers.
64
Why the PPF Might Be Bowed Outward
• The PPF is bowed outward when:
– Different workers have different skills
– There are different opportunity costs of
producing one good in terms of the other
– There is some other resource, or mix of
resources, with varying opportunity costs
• E.g., different types of land suited for different
uses
Micro- and Macroeconomics
• Microeconomics
– The study of how households and firms
make decisions and how they interact in
markets
• Macroeconomics
– The study of economy-wide phenomena,
including inflation, unemployment, and
economic growth
The Economist as Policy Adviser
The Economist as Policy Adviser
• Positive statements: descriptive
– Attempt to describe the world as it is
– Confirm or refute by examining evidence:
“Minimum-wage laws cause
unemployment.”
• Normative statements: prescriptive
– Attempt to prescribe how the world should
be: “The government should raise the
minimum wage.”
Active Learning: Positive or normative?
Which of these statements are “positive” and
which are “normative”? How can you tell the
difference?
A. Prices rise when the government increases
the quantity of money.
B. The government should print less money.
C. A tax cut is needed to stimulate the economy.
D. An increase in the price of burritos will cause
an increase in consumer demand for movie
streaming.
69
Active Learning: Answers
A. Prices rise when the government increases the
quantity of money. Positive—describes a
relationship, could use data to confirm or refute.
B. The government should print less money.
Normative—this is a value judgment; cannot be
confirmed or refuted.
C. A tax cut is needed to stimulate the economy.
Normative—another value judgment.
D. An increase in the price of burritos will cause an
increase in consumer demand for movie streaming.
Positive—describes a relationship.
Note: A statement need not be true to be positive.
70
Economists in Washington – 1
• Council of Economic Advisers
– Advises the president
– Writes the annual Economic Report of the
President
• Office of Management and Budget
– Helps formulate spending plans and
regulatory policies
• Department of the Treasury
– Designs tax policy
Economists in Washington – 2
• Department of Labor
– Analyzes data on workers and those looking
for work
– Formulates labor-market policies
• Economists at the Department of Justice
– Enforce the nation’s antitrust laws
• Congressional Budget Office
– Helps the Congress
• The Federal Reserve
– Sets monetary policy
Why Economists’ Advice Is Not Always Followed
• The president receives advice from:

– Economists
– Communication advisers
– Press advisers
– Legislative affairs advisers
– Political advisers
• The president makes the decision.
Why Economists Disagree
Why Economists Disagree
• Economists often give conflicting policy
advice:
– Can disagree about the validity of alternative
positive theories about the world
– May have different values and, therefore,
different normative views about what policy
should try to accomplish
Yet, there are many propositions about
which most economists agree.
• Economists are scientists.
– Make appropriate assumptions and build
simplified models
– Use the circular-flow diagram and the
production possibilities frontier
• Microeconomists study decision making by
households and firms and their interactions in
the marketplace.
• Macroeconomists study the forces and trends
that affect the economy as a whole.
76
• A positive statement is an assertion about how
the world is.
• A normative statement is an assertion about
how the world ought to be.
• As policy advisers, economists make normative
statements.
• Economists sometimes offer conflicting advice.
– Differences in scientific judgments
– Differences in values
77

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* Lecturer: Van, Cao Hai (MSc.) * Email: vanch@hvnh.edu.vn * Zalo: 0904.380.

Interactive PowerPoint Slides by:

1.How People Make Decisions

Principle #1: People face trade-offs

• Efficiency: Society gets the maximum benefits from its

• The more it spends on

B. You pay $12/month for access to Netflix,

Principle #5: Trade can make everyone

• People benefit from trade:

• Government: enforce property rights

Principle #8: A country’s standard of living

• Huge variation in living standards across

• Productivity: most important determinant

Factors of Labor, land,

• As the economy shifts

resources from beer to

A mountain bikes is low. workers are producing

At B, opportunity • At B, most workers

• The president receives advice from:

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