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Unformatted text preview: Principles of Microeconomics
Chapter 1 and 2 Introduction 1 What is Economics and How do we study it? Economics – The study of how people allocate their limited resources to satisfy their unlimited wants.
– Resources are limited in two ways: 1. People have limited income 2. There exists limited goods in the economy – There exists trade offs between what goods to give up so you can consume other goods. – Ex. Class size.
2 2 Divisions in Economics Macroeconomics The part of economic analysis that studies the behavior of the economy as a whole. Topics include: changes in unemployment rates, general price level and national income.
Microeconomics 3 CostBenefit Analysis One tool to study microeconomics is cost benefit analysis. CostBenefit Principle: An individual (or firm, or society) should take action if and only if the extra benefits from taking the action are at least as great as the extra costs. 4 CostBenefit Analysis Example Suppose purchase a book near by for $25.00 but learn it is on sale at a store 30 minutes away for $15.00.
– Cost: travel time and resources to the store further away
– Benefit: $10.00 saved
– Does the benefit out weigh the costs?
OR is $10.00 – 30 minute travel time > 0 Different units Answer depends on how people value their time.
5 Economic Theories, Models and Assumptions Economic Theory: A generalization that summarizes what we understand about the economic choices that people make.
Economic Model: A description of the essential elements of a situation and analyzes them in a logical way.
– Why do we need models? Economic Assumptions: Centralizing concepts accepted as truth when forming economic models (see Mankiw handout).
http://www.youtube.com/watch?v=VVp8UGjECt4 6 Economic Theories, Models and Assumptions
Economic Assumptions 7 Graph Review Graphs display relationships between economic variables and are critical in economic modeling. Variable: a factor that changes due to changes in its surroundings
Examples of X and Y: Y 1. Amount of rainfall and number of flowers
2. Amount of pretzels and beer consumed.
X 3. Price and quantity 8 Graph Review: 4 types of Relationships 1. Positive or Direct Relationship: a relationship between variables that move in the same direction. Positive Linear Relationship: As X increases, Y increases at the same Positive relationship that is becoming steeper: As X increases, Y increases by greater amounts Positive relationship that is becoming less steep: As X increases, Y increases by less 9
amounts Graph Review: 4 types of Relationships 2. Negative or Inverse Relationship: a relationship between variables that move in opposite directions. Negative relationship that is Negative Linear becoming steeper: As X Relationship: As X increases, Y decreases at he increases, Y decreases by greater amounts
same rate and vice versa Negative relationship that is becoming less steep: As X increases, Y decreases by less amounts
10 Graph Review: 4 types of Relationships 3. Relationships that have a maximum or a minimum Relationship with a Maximum Relationship with a Minimum
11 Graph Review: 4 types of Relationships 4. Variables that have no Relationship Y is not effected by X. Regardless of how X changes, Y stays the same. X is not effected by Y. Regardless of how Y changes, X stays the same. 12
12 Graph Review: Slope Slope: Rate of change of one variable as compared to the other. The change in the value of the variable on the Y axis divided by the change in the value of the variable on the X axis.
– Slope= 13
13 For Next Class…… Read Introduction Pages on your syllabus for more information on what we did today. Begin Reading the Demand Pages. 14
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- Spring '08