lecture2 - Introductory Microeconomics LECTURE 2...

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Introductory Microeconomics LECTURE 2 – INTRODUCTION TO KEY CONCEPTS **Please see the extra reading posted on the LMS site.** 1. What we’ll do in this lecture Introduce the economic theory of decision-making : - What is economics about? [Making choices] - What methods do economists use? [Develop and test theories] - The economic theory of decision-making [Cost-benefit principle – how do we measure cost?] - Do people really respond to costs and benefits? [Case study; other examples] 1
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2. What is economics about? Economics is about human well-being. • Economists think of well-being as depending on consumption of ‘goods and services.’ • Goods and services we consume are produced using ‘resources.’ What do we mean by ‘resources’? Time and human capital; physical and financial assets; natural resources. 2
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The fundamental problem individuals and societies face is scarcity of resources . - Not sufficient resources to satisfy people’s wants. Scarcity of resources implies we need to make decisions about how to use or allocate the available (limited) resources. These decisions matter. - How we use our resources will affect our well-being as individuals and as a society. • Who are the decision-makers? - Individuals (you and me), firms, governments, etc. • In summary: Economics is the study of economic activity – the decisions we make about how to use our scarce resources. 3
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3. What methods do economists use? • Economists use the scientific method: (1) They develop theories to describe and understand economic activity. (2) They gather data to test the predictions of the theories they develop. (3) Based on the results of their empirical tests, they refute or verify the theories they develop. • A theory consists of: (i) A model of the situation we are interested in studying; (ii) Hypotheses or predictions derived from that model. 4
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• Model = Essential features of situation being studied. The goal of a model is to simplify reality in order to understand it better. “A map is valuable precisely because it simplifies and omits. Economic models are maps for the market economy.” [John Kay, 2003, The Truth About Markets , p.193] • The core assumption of economic theories: Rationality.
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