Bài giảng Microeconomics - Chapter 1 Thinking Like an Economist

Thinking Like an Economist0What is Chapter 1 about?1I. Economics: Studying Choice in a World of ScarcitySlide 1 - 22If you could always get everything you wanted, immediately and for freeThen you wouldn’t have to chooseOnly say “More please”But the real world isn’t like thatScarcity of time, $, other resources makes CHOICE necessary3Costs MatterEconomists count costs (and benefits)Someone must pay the costs Someone gets the benefitsScarcity is a general phenomenonNever enough time, money, energy.Economics - the study of how people make choices under conditions of scarcity and of the results of those choices for society4Scarcity ProblemImplicationsTradeoffs are widespreadHaving more of one good usually means having less of anotherAKA the “No free lunch Principle”5The Cost-Benefit PrincipleTake an action if, and only if, the extra benefits from taking the action will be at least as great as the extra costsEstimating costs and benefits Often difficult – many potential calculationsNecessarily refers to future outcomesHence - have to use assumptionsWHICH ASSUMPTIONS ? – a judgment call6II. Applying the Cost/Benefit PrincipleSlide 1 - 77RationalityEconomists usually assume that people are rational—in the sense that they know their own goals and try to fulfill these goals as best they canCalculating the implications of rational behavior provides a benchmark for forecasting8Benefits and Costs – Measured comparably ($$)To compare the size of benefits to the size of costs they must be measured in comparable unitsDollars are often the most convenient unit9All transactions have two sides – so for any good .. Reservation Price : The highest price a buyer would be willing to pay for any good or serviceFrom buyer’s point of view - equal to the benefit received from the good or serviceReservation Price : The lowest payment a seller would be willing to accept for giving up a good or performing a serviceFrom seller’s point of view - equal to the cost of the good or service10Economic SurplusThe benefit of taking an action minus the cost of taking that actionEconomic Surplus = Benefit – CostExample: if I can sell for $10 when my reservation price is $8, then Benefit of sale = $10Cost of sale = $ 8 Economic Surplus = $2Rational decision makers take all actions that yield a positive economic surplus11Relevant Cost is: Opportunity CostOpportunity Cost: The value of the next-best alternative that must be forgone in order to undertake an activityRational decisions depend upon opportunity costsOpportunity cost is value of the next best alternative Determines the reservation price 12Example - Ironing ShirtSuppose you need to choose between ironing your shirt (which will take 20 minutes) or doing other things instead.Do you iron your shirt or not?A cost-benefit analysis says do it only if the benefits outweigh the costs13How large is the benefit of an Ironed Shirt ?Your benefit can be estimated by your reservation price for buying the serviceThe highest price you would be willing to pay someone to have the shirt ironedIf you would be willing to pay $2.25 to have the shirt ironed – implies the benefit to you of having an ironed shirt is $2.2514How large is the cost of Ironing your Shirt ?Your own personal cost of ironing the shirt can be estimated by your reservation price How much would you want in return for doing this job for someone else ?I.e. the lowest dollar amount you would accept to iron that shirtSuppose = $2.0015SolutionIf benefit of having an ironed shirt ($2.25) is greater than the cost of ironing the shirt ($2.00) your economic surplus is $0.25You are better off if you iron your shirtSuppose that the value of your own alternatives changeA test tomorrow ? need the 20 minutes to study? Your opportunity costs have changed 16III. The Role of Economic Models: SummarySlide 1 - 1717Abstract ModelsAn “abstract model” is a simplified description capturing essential elements of a situationE.g. - High school physics calculates rate of acceleration of falling object, ignoring air frictions – why ?- allows logical analysis- includes the major forces at work more complicated models needed for more complex problems18It’s often a question of “how much”Many decisions are about how much of something to doE.g. how much to spend on dinnerA rational person pursues an activity so long as, for each unit of activity:The additional benefitsExceed the additional costs 19Imperfect Decision MakersRational people will apply the cost-benefit principle But exact calculations cost time & effortSo people use their intuition & rules of thumbHence people can make mistakes when weighing the costs and benefitsPeople often make inconsistent choices20Marginal ConceptsMarginal BenefitThe increase in total benefit that results from carrying out one additional unit of an activityMarginal CostThe increase in total cost that results from carrying out one additional unit of the activity21Optimal Level of activityIf the marginal benefit is greater than marginal costIncrease the level of the activityIf the marginal benefit is less than the marginal costDecrease activityOptimal activity level for individual is where marginal benefit equals marginal costMarginal Benefit = Marginal CostMB = MC22Fig. 1.1 The Marginal Cost and Benefit of Additional RAM23Fig. 1.2Falling RAM Prices Increase the Optimal Amount of MemoryMBValue of an additionalmegabyteOptimal amount of memorywhen cost = $2/megabyteOptimal amount of memorywhen cost = $1/megabyte24Fig. 1.3An Increase in the Marginal Benefit of RAM Increases the Optimal Amount of MemoryOptimal amount of memory when marginal benefit = MBOptimal amount of memory when marginal benefit = MB′25IV. Microeconomics vs. MacroeconomicsSlide 1 - 2626Micro and MacroMicroeconomics studies subjects likeChoices of individualsBehavior of specific marketsPrices and quantitiesMacroeconomics studies subjects likePerformance of national economiesGovernment policies to change performanceUnemployment rate and the price level27Economic Naturalism“Living in the Laboratory of Real Life”Using your insights from economics to make sense of observations from everyday lifeLearning economic principles enables us to see the ordinary details of life in a new lightE.G., Look for differences in costs and benefits28End of Chapter SlidesConcept Maps meant for student printouts follow.These slides are also available in pdf format.Slide 1 - 2929What is Chapter 1 about?30I. Economics: Studying Choice in a World of Scarcity31II. Applying the Cost/Benefit Principle32III. The Role of Economic Models: Summary33IV. Microeconomics vs. Macroeconomics34Summary of Chapter 135