1 Intro class Student Copy(1)

1 Intro class Student Copy(1) - Principles of...

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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 Theories Economic Models 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 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 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 14 ...
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