ECO 211 SYLLABUS MICROECONOMICS Lecture Outline - Chapter 1

OUTLINE -- CHAPTER 1
The Nature and Method of Economics:
An introduction to the 5Es
(You can find parts of this lecture online at: http://www.harpercollege.edu/mhealy/eco212i/lectures/5es/5es.htm)

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

• Syllabus:
  • instructor
  • web page: http://www.harpercollege.edu/mhealy/eco211/michome.htm
  • Textbooks
    
• Preview:
  • What is Economic /Microeconomics ?
  • What is Efficiency ?
  • What are the "5 Es ?
  • Preview of Some Issues

A. Definitions of Economics?

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

"Economics is . . . . "

 

 

 

 

 

2. DEFINITIONS:

1. MARK'S DEFINITION:
   
   
2. TEXTBOOK'S DEFINITION : Economics is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants
   1. Problems:
      • "efficient" ?
      • "scarce" ?
   2. GOAL: Maximize Satisfaction !

    

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

B. What is MICROECONOMICS ?

1. Microeconomics News:

• http://www.cnn.com/2002/US/01/13/gas.prices/index.html

2. Macroeconomics News:

• http://cgi.cnnfn.com/output/pfv/2001/01/11/economy/jobless/

3. MICROECONOMICS studies the INDIVIDUAL parts of an economy:

• individual industries, products and businesses
• for example:
  • why does the price of plywood increase
  • why are wages increasing
  • what are the effects of Nestle buying Ralston-Purina
  • Why will 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 . . . .

1. economic growth ?
   
2. using as few resources as possible when producing a product ?
   
3. using resources to produce more CDs that people want and fewer cassette tapes that they don't want ?
   
4. using all of our resources (full employment) ?
   
5. a fair distribution of products ?

C. "EFFICIENCY" vs. the "5Es"

1. GOAL: to maximize society's satisfaction
2. "Efficiency" is a vague concept
3. The 5 Es are five ways to achieve this goal:
   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"

1. http://netra.sptimes.com/Weather/92698/Gouging_complaints__r.html .-.
   
2. Is it GOOD for the citizens of Florida ifthe price of plywood increases from $20 to $60 after a hurricane?
   
3. Remember, the goal is to maximize society's satisfaction

 

2.  Coca-Cola Lays off 6000

1. http://cgi.cnnfn.com/output/pfv/2000/01/26/worldbiz/coke/ .-.
   
2. Are these lay offs GOOD for society?
   
3. Remember, the goal is to maximize society's satisfaction
   

3. Not all Lay-Offs are good for society

 

4. Are gasoline prices TOO LOW?

1. Remember the goal is to achieve the 5 Es in order to maximize society's satisfaction
   
2. http://www.energy.ca.gov/fuels/gasoline/world_gasoline_prices.html
   
3. Why?

III. What Is Economics?

A. DEFINITION:

1. MARK'S DEFINITION:
   
   
2. TEXTBOOK'S DEFINITION : Economics is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants

   1. Problems:
      • "efficient" ?
      • "scarce" ?
   2. GOAL: Maximize Satisfaction !
      

3. 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")
2. reducing wants
3. use existing resources wisely = maximizing satisfaction

VII. Maximizing Satisfaction -- Four More Es
The goal of our decision-making

A. Productive Efficiency

1. definition: producing at a minimum cost

2. Prod. Eff. 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

• 1000s LAYED OFF:
  • http://cgi.cnnfn.com/output/pfv/1999/12/07/companies/layoffs/
  • http://cgi.cnnfn.com/output/pfv/1999/01/07/economy/challenger/
  • http://cgi.cnnfn.com/output/pfv/1998/03/20/companies/planes/
  • Coca-Cola Lays off 6000
    http://cgi.cnnfn.com/output/pfv/2000/01/26/worldbiz/coke/
• BUT
  • http://cgi.cnnfn.com/output/pfv/1999/08/06/economy/jobs/
  • http://cgi.cnnfn.com/output/pfv/1999/12/03/economy/jobs/
    
• Not all Lay-Offs are good for society

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

• Trade Deficit: http://cnnfn.cnn.com/2001/03/20/economy/trade/index.htm

(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"

• http://netra.sptimes.com/Weather/92698/Gouging_complaints__r.html
• http://www.sptimes.com/Weather/92598/Pinellas_put_on_price.html

(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?

• http://cgi.cnnfn.com/output/pfv/1997/05/30/economy/coffee_pkg/
• http://www.cnn.com/2000/US/07/19/lower.prices/index.html

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: http://www.census.gov/ftp/pub/hhes/income/histinc/h02.html
b. World:

• http://www.globalpolicy.org/socecon/inequal/inctab.htm
• global.gif

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

• http://stats.bls.gov/wh/cpsbref3.htm
• http://www.publicpurpose.com/oecdunem.htm

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

D. Resources and Resource Payments

1. land -- rent
2. capital -- interest
3. labor -- wages
4. entrepreneurial ability -- profits or losses

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