ECO 211 SYLLABUS

MICROECONOMICS

Lecture Outline - Chapter 1
OUTLINE -- CHAPTER 1
Limits, Alternatives, and Choices: What is Economics, the 5Es, and Making Choices
(You can find parts of this lecture online at: http://www.harpercollege.edu/mhealy/eco211/lectures/micro17-1.htm )

REVIEW:

 

INTRODUCTION

http://www.youtube.com/watch?v=YgB6mFmYEcM&feature=related

I. Answer the following:

On the 3" x 5" card provided, answer the following question:

Assume that a hurricane has struck the coast of Florida causing massive destruction. As a result, the prices of many products like hotel rooms, water, plywood, etc. increase significantly. For example, let's say the price of plywood increases from a price of $10 a sheet before the hurricane to $30 a sheet after the hurricane.

QUESTION: Should the Florida government pass a law keeping the price of these products (like plywood) to their levels before the hurricane struck? OR What should the government do, if anything?

 

 

 

 

 

 

 

II. Introduction to ECO 211 - Day 1

  • Instructor

 

 

 

3. MICROECONOMICS studies the INDIVIDUAL parts of an economy:
  • individual industries, products and businesses
  • for example:
    • What is the price of a lift ticket?
    • Why does the price of plywood increase?
    • Why are wages increasing?
    • What are the effects of Vail Resorts buying Keystone and Breckenridge ski resorts?
    • Why did Motorola lay off 2000 workers in Harvard, IL?

     

    • some believe microeconomic principles form the foundation of economic theory.

4. MACROECONOMICS studies the economy as a whole:

  • unemployment
  • inflation
  • economic growth

B. What is Efficiency?

 1. ACTIVITY: On a 3x5 card write YOUR definition of efficiency.

"Efficiency is . . . . "

 

 

 

 

 

2. IS EFFICIENCY . . . .

a. Is EFFICIENCY the same as economic growth ?

b. Is EFFICIENCY using as few resources as possible when producing a product ?

c. Is EFFICIENCY using resources to produce more CDs that people want and fewer cassette tapes that they don't want ?

d. Is EFFICIENCY using all of our resources (full employment) ?

e. Is EFFICIENCY a fair distribution of products ?

 

C. "EFFICIENCY" vs. the "5Es"
  1. GOAL OF THE ECONOMY: to maximize society's satisfaction
  2. "Efficiency" helps do this, but it is a vague concept
  3. The 5 Es are five ways to maximize society's satisfaction:
    1. Economic growth
      an increase in our ABILITY to produce
    2. Productive Efficiency:
      using as few resources as possible when producing a product
    3. Allocative Efficiency:
      using resources to produce more CDs that people want and fewer cassette tapes that they don't want
    4. Full Employment:
      using all of our resources
    5. Equity:
      a fair distribution of products

C. Preview: Some Issues

1. Natural disasters and "price-gouging"

2.  Coca-Cola Lays off 6000

  • read
  • Are these lay offs GOOD for society?
  • Remember, the goal is to maximize society's satisfaction (i.e. produce more things)

 

 

3. Are gasoline prices TOO LOW?

 
WHAT IS ECONOMICS? -- THE 5 Es

 

III. What Is Economics?

A. DEFINITION:

 

  • TEXTBOOK'S DEFINITION : Economics is the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.
    • What I like: The emphasis on making CHOICES
    • What is unclear: What does "SCARCITY" mean?
    • GOAL OF ECONOMICS: BEST CHOICES = Maximize Satisfaction !

     

  • OUR DEFINITION: Economics is the study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants

B. Our definition has 4 parts:

  1. "study of"
  2. choice
  3. scarcity
  4. maximizing satisfaction

IV. "Study Of" -- Using theories

A. based on facts
B. simplifications
C. generalizations
D. abstractions
E. ceteris paribus

V. Why Study Economics?

VI. The Economic Perspective: Scarcity and Choice [5 Es ]

A. Microeconomics - The study of making choices

B. Scarcity -- Limited resources and Unlimited wants
The reason why we have to make choices

 

 

B. The necessity of choice

 

C. options for dealing with scarcity

1. economic growth ( the first "E")
a. DEFINITION: an increase in the ABILITY to produce goods and services

b. caused by:

  1. MORE resources
  2. better resources
  3. better technology

c. textbook: "An outward shift in the production possibilities curve which results from an increase in resource quantity or quality or an improvement in technology" (more on this later)

2. Reducing wants
3. Use existing resources wisely = maximizing satisfaction

 

VII. Maximizing Satisfaction -- 5Es - four more Es
The goal of our decision-making

A. Productive Efficiency
1. definition: producing at a minimum cost

2. Prod. Efficiency. and Scarcity:

By producing at a minimum cost, FEWER RESOURCES are used and MORE can be produced

3. HOW?

a. not using more resources than necessary
b. using resources where they are best suited
c. using appropriate technology

4. Examples

a. Productive Efficiency: not using more resources than necessary
(1) How does this MAXIMIZE SOCIETY'S SATISFACTION?
(a) amount produced
(b) price

(2) Examples:

(a) Janitors at Harper
(b) Grocery stores: USSR
(c) Motorola/Sears/AT&T/etc. lay off 1,000s

b. Productive Efficiency: using resources where they are best suited

(1) How does this MAXIMIZE SOCIETY'S SATISFACTION?
(a) amount produced
(b) price

(2) Examples:

(a) secretaries/truck drivers
(b) doctors/engineers
(c) IL-corn/Ala-cotton
(d) ND-potatoes/Honduras-sugar
(e) free trade

(f) discrimination

c. Productive Efficiency: using appropriate technology

(1) What is appropriate?
(a) appropriate = min. cost
(b) best technology?

(2) How does this MAXIMIZE SOCIETY'S SATISFACTION?

(a) amount produced
(b) price

(3) Examples:

(a) farming: US/Kenya
(b) farming: tractors/helicopter
(c) Chicago/Beijing airport
(d) Other

B. Allocative Efficiency

1. definition
using our limited resources to produce:
  • THE RIGHT MIX OF GOODS
  • MORE OF WHAT PEOPLE WANT
  • LESS OF WHAT PEOPLE DON'T WANT

2. How does this MAXIMIZE SOCIETY'S SATISFACTION and REDUCE SCARCITY?

3. examples

a. steel: horseshoes or cars
b. crude oil: gasoline or kerosene
c. small cars or SUVs

4. Allocative inefficiency

a. producing TOO MUCH or TOO LITTLE
shortages and surpluses

b. How does allocative inefficiency affect scarcity?

c. examples:

(1) US agriculture: mountains of grain
(2) long lines in Poland
(3) Super bowl tickets
(4) Natural disasters: "price-gouging"

(5) food price controls

(6) gasoline

(a) WWII
(b) 1970s: Arab oil embargo
(c) during Gulf War

c. WHAT CAN BE DONE?

5. The importance of prices

a. What is a shortage?

b. gasoline
c. Super Bowl tickets
d. scalpers
d. food price controls and famine

C. Equity

1. definition: a "fair" distribution of income, or goods and services
2. Equity vs. Equality
3. examples
a. US:

b. World:

4. How does equity help society achieve the maximum possible satisfaction from its limited resources?

a. President Bush example
b. the role of Diminishing Marginal Utility

D. Full Employment

1. definition: using ALL available resources

2. Examples

a. labor: FE = about 5% unemployment

b. capital utilization rate: FE = about 85%

c. land

d. entrepreneurial ability

3. How does full employment help society achieve the maximum satisfaction from its limited resources?

VIII. Limited Resources: The Four Factors of Production

A. What is a resource?

B. Types of Resources

1. Land
a. examples
b. definition

2. Capital

a. examples
b. definition

3. Labor

a. examples
b. definition

4. Entrepreneurial Ability

a. examples
b. definition

C. Resource Quiz

 

GRAPHING

IX. Economic Models

A. Demonstrating economic concepts
B. Line Graphs

1. construction
2. inverse and direct relationships
3. slope

a. linear (straight) graph
b. nonlinear (bent) graph

MAKING CHOICES

Individual's Economizing Problem

 

Society's Economizing Problem: Why we have to make choices

I. The Necessity of Choice -- Production Possibilities

A. The Economizing Problem -- The Necessity of Choice
The choices necessitated because society’s material wants for goods and services are unlimited but the resources available to satisfy these wants are limited.

1. Unlimited Wants
2. Limited resources

B. Production Possibilities -- Demonstrating the Necessity of Choice

1. Production Possibilities Table
a. shows the MAXIMUM POSSIBLE LEVELS OF PRODUCTION given the assumptions
b. assumptions
1) fixed resources
2) fixed technology
3) productive efficiency
4) full employment
5) only two goods

c. the necessity of choice -- Unattainable combinations

2. Production Possibilities Curve

The Production Possibilities Curve can be use to illustrate several important economic concepts:

  • we must make choices
  • choices have opportunity costs
  • the law of increasing costs
  • the effect of unemployment
  • the effect of productive inefficiency
  • the effect of economic growth
  • how present choices affect future possibilities
  • it does NOT show the optimum product mix (allocative efficiency)

a. the necessity of choice -- Unattainable combinations
b. opportunity costs

1) ALL costs in economics are opportunity costs
2) definition

The amount of other products which must be forgone or sacrificed to produce a unit of a product.

3) examples

  • op. cost of coming to class today
  • op. cost of attending NIU
  • op. cost of a free trip to Europe
  • What is the op. cost of a human life?

4) calculating opportunity costs

c. law of increasing costs

1) definition

As the production of a good increases the opportunity cost of producing an additional unit rises.

2) shape of the PPC -- concave
3) rationale

d. unemployment
e. productive inefficiency
f. economic growth

1) definition
(a) Our Definition: an increase in the ABILITY to produce goods and services

(b) Testbook's definitionAn outward shift in the production possibilities curve which results from an increase in resource quantity or quality or an improvement in technology

(c) Common Definition: economic growth occurs when the economy produces more

2) causes

  • getting more (additional) resources
  • getting better resources
  • getting new, better, technology

3) graphically
4) "ABILITY" vs. how much is actually produced
5) Is a shrinking PPC? possible?
6) What would cause non-proportional growth

g. present choices, future possibilities
h. optimum product mix? (allocative efficiency?)

The Production Possibilities Curve can be use to illustrate several important economic concepts:

  • we must make choices
  • choices have opportunity costs
  • the law of increasing costs
  • the effect of unemployment
  • the effect of productive inefficiency
  • the effect of economic growth
  • how present choices affect future possibilities
  • it does NOT show the optimum product mix (allocative efficiency)
    • we'll use the MB=MC analysis to do this (see figure 1.3 [p. 13] of your textbook)

C. Real World Applications

1. The economics of War (p. 14)
  • defense good, civilian goods and the "war on teror"
  • Marginal Benefit and Marginal Costs
  • 9/11 increase the MB of defense goods

2. discrimination
3. growth: Japan vs. U.S.
4. international trade

  •  

II. The Necessity of Choice -- HOW?

  • p. 5, "Marginal Analysis: Benefits and Costs"
  • pp. 13-14, "Optimal Allocation" (especially fig 1.3),
  • p. 14 "The Economics of War" (box)
  • Ch. 8: p. 161 Last Word: Sunk costs are irrelevant in decision making
  • Ch. 16: pp. 319-321, "Society's Optimal Amount of Externality Reduction"
  • Ch. 22: p. 435 "Immigration: Two Views"

A. Benefit-Cost Analysis
"the economic perspective")

1. definition
the selection of ALL possible alternatives where the marginal benefits are greater than the marginal cost

select all where: MB > MC
up to where: MB = MC
but never where: MB < MC

TEXTBOOK: Marginal Analysis: the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making .

2. marginal benefits and marginal costs

  • marginal benefit

    The extra (additional) benefit of consuming one more unit of some good or service; the change in total benefit when one more unit is consumed.

  • marginal cost

    The extra (additional) cost of producing one more unit of output; equal to the change in total cost divided by the change in output (and in the short run to the change in total variable cost divided by the change in output).

3. Marginal Benefit = Marginal Cost Rule

  • The point at which the size or scope of production (or any decision) is optimized.
  • The activity, scope, or output of a project (or decision) should be increased until it reaches this point - or comes very close to it.
  • This point will yield the maximum net benefit to society.
  • If marginal benefit exceeds marginal cost, then the project is too modest, and could be increased thereby increasing the net benefit to society;
  • however, if the marginal cost exceeds the marginal benefit, then the project will decrease the net benefit to society and should be decreased in scope.
  • For example, if the cost of a proposed government program exceeds its benefits, then it would be unwise to undertake it, but if the benefits exceed the cost, then it would be uneconomical, or "wasteful" not to spend on that government program.

4. ignore fixed or sunk costs

any cost that does not change as a result of the decision

TEXTBOOK: A fixed cost is any cost which in total does not change when the firm changes its output; the cost of fixed resources.

5. Changes in MC and MB

  • if MC INCREASE then people will do LESS
  • if MC DECREASE then people will do MORE

 

  • in MB INCREASE people will do MORE
  • if MB DECREASE people will do LESS

6. examples

a. How many guards should be hired?
b. How many bridges should be built?
c. Should I go to class today?
d. should I attend NIU full time?
e. Should I drive fast?
f. The economics of War (p. 13)
  • defense good, civilian goods and the "war on teror"
  • Marginal Benefit and Marginal Costs
  • 9/11 increase the MB of defense goods

g. Immigration: Two Views (p. 435)

h. "Sunk costs are irrelevant in decision making" (p. 161)

  • buy tickets to football game but wake up with the flu - should you go?
  • you buy "totally mushy" apples
  • already paid a nonrefundable annual lease for a business - should you move to a more profitable location
  • $1 million spent on R&D for a new product that few people want - should you produce it anyway even at a loss?
    • New Coke
    • McLean

i. Others

Think of a decision that you currently have to make. What are the marginal benefits and the marginal costs? Are there any sunk costs that do not matter?

5. GRAPHICALLY [mcmb.jpg]


B. Microeconomic Applications

1. optimal quantity of a good: MSB = MSC

2. utility maximizing rule: MUa/Pa = MU b/Pb (Ch. 7)

3. profit maximization: MR = MC (Ch. 9, 10, 11,)

4. rule for employing resources: MRP = MRC (Ch. 13, 14)

C. REVIEW: Multiple Choice Problems