101 Economics Introductory Microeconomics Amit K. Gandhi Office Hours: Mon and Wed 4-5 PM 6426 Social Science
Syllabus
Schedule of reading and homework available through Aplia Two Midterms (Feb 20 and April 9) Each Midterm 20%, Homework 20%, Final 40% OR Higher Midterm Exam 30%, Homework 20%, Final 50%
The Text
Robert Frank and Ben Bernanke, "Principles of Microeconomics" 3rd edition Schedule of readings and homework assignments available through www.aplia.com. Course key is : 6SGG-AVWB-FBQG
"I'd like to introduce you to Marty Thorndecker. He's an economist but he's really very nice."
Most students who take introductory economics leave the course without really having learned even the most important basic economic principles. Their ability to answer simple economic questions several months after leaving the course is not measurably different from that of people who never took a principles course.*
*Hansen, W. L., M. K. Salemi, and J. J. Siegfried. 2002. Use it or lose it: teaching economic literacy. American Economic Review (Papers and Proceedings), 92 (May): 463-72.
Opportunity Cost
The opportunity cost of a engaging in an activity is the value of everything you must sacrifice to engage in it.
Do students learn the opportunity cost concept successfully? "Do Economists Recognize an Opportunity Cost When They See One" Paul J. Ferraro Laura Taylor
You won a free ticket to an Eric Clapton concert. Bob Dylan is playing on the same night and is your most attractive alternative. Ticket to see Dylan is $40 You would be willing to pay up to $50 to see Dylan No other costs of seeing either performer
Willing to pay $50 to see Dylan Cost of Dylan ticket = $40 Based on this information, what is the opportunity cost of seeing Clapton a) $0 b) $10 c) $40 d) $50
Correct answer = b. $10
7.4% of 270 undergrads who had previously taken a course in economics answered the question correctly 17.2% of 88 undergrads who had never taken a course in economics answered the question correctly
Why do residents of Manhattan tend to be rude and impatient, while residents of Topeka tend to be friendly and courteous?
Economics in One Lesson
"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups"
Henry Hazlitt
The Scarcity Principle (Also called the No-Free-Lunch Principle)
Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.
Microeconomics is the study of how people make choices under conditions of scarcity and of the results of those choices for society. The Rationality Assumption: People have goals and try fulfill to them as best they can.
Cost-benefit analysis
Should I do activity x?
C(x) = the costs of doing x B(x) = the benefits of doing x If B(x) > C(x), do x; otherwise don't.
Should we make the econ class smaller? (From 300 to 25) Benefit of making the class size smaller = the max amount people would be willing to pay for a smaller class size = B(x) Cost of making the class size bigger = The increase in cost per student = C(x)
Some relevant costs:
Faculty salary: $60,000 per course
Per student faculty salary cost: 1 section: $60,000/300 = $200 12 sections: $60,000/25 = $2400
Cost of decreasing class size from 300 to 25 students = ($2400 - $200) = $2200 = C(x)
If you were currently in a class with 300 students, what is the maximum dollar amount you would pay to switch to one with 25 students? B(x) If B(x) < $2200, then it makes sense to keep the larger class.
The Cost-Benefit Principle An individual (or a firm, or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
Critics of the cost-benefit approach often object that people don't really calculate costs and benefits when deciding what to do.
Milton Friedman
People often behave as if they were comparing the relevant costs and benefits.
People often make bad decisions because they fail to compare the relevant costs and benefits.
Can cost-benefit analysis help you make better decisions? Example 1.2 You are about to buy a $20 alarm clock at the campus store when a friend tells you that K-mart has the same alarm clock on sale for $10.
Do you drive down to Kmart?
Example 1.3. You are about to buy a $2510 laptop computer from the campus store when a friend tells you that K-mart has the same computer on sale for $2500.
Do you drive down to K-mart?
Should you drive down to K-mart?
B(x) = benefit of driving down to K-mart = $10 in both cases C(x) = cost of driving down to K-mart = the same amount in both cases.
So your answer should be the same in both cases.
Example 1.6. Losing a $20 bill
You have just arrived at the theater to buy your ticket and discover that you have lost a $20 bill from your wallet. Do you buy a ticket and see the play anyway?
Example 1.7. A lost theater ticket.
You have just arrived at the theater and discover that you have lost the $20 ticket you purchased earlier that day. Do you buy another ticket and see the play anyway?
In both cases, you are $20 poorer than before.
In both cases, the benefit of seeing the play, as measured by what you are willing to pay, may therefore be slightly smaller, but this benefit is the same in both cases.
In both cases, the additional cost you must incur to see the play is exactly $20.
Since the relevant costs and benefits are the same in both cases, your decision should also be the same.