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Introduction
and Math Review
Eric Doviak
Principles of Microeconomics
Helpful hints
x Economics doesn’t have to x Most important part of any
be difficult economic model are the:
x BUT... some people make ASSUMPTIONS
x it difficult for themselves. x If you understand the
x I did. assumptions of the model,
x If a model is unclear, don’t you will understand the
try to think of an example conclusions.
from the $10 trillion US x You will NOT understand
economy. the conclusions, if you don’t
x Instead, apply the model to understand the
a small rural village. assumptions.
x WHEN READING, DON’T
SKIP CHAPTERS!
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Scope & Method of Economics
Why should I study economics?
x To learn a way of thinking! Hopefully, you’ll learn to use three
key concepts in your daily lives:
o efficient markets
o marginalism and
o opportunity cost
Efficient markets
x Profit opportunities are rare because everyone is looking for them.
x Efficient markets eliminate profit opportunities immediately.
x Ex. You’ll never find a good parking space, because if there was a
good one, it would already be taken before you got there.
Marginalism
Average cost – total cost divided by quantity
x If I spend 300 hours preparing 30 lessons for you:
x You had better study!
x My average cost per lesson is 10 hours.
Sunk cost – costs that can no longer be avoided because they have
already been “sunk”
x If I teach this class again next semester, I will have already sunk
300 hours into preparation.
x If your boss increased your income from $31,000 to $32,000, how much more
would you consume?
o On average, you would consume an extra $570 worth of goods.
o Put differently, if you were an average person, your expenditure on
consumption goods would rise from $31,209 to $31,779.
x Every $1000 increase in income raises consumption by $570. Why?
x marginal propensity to consume = 0.57 (NB: that’s the slope of the line!)
Economic policy
x Positive – economic policy starts with positive theories and
models to develop an understanding of how the economy works
x Then economic policy evaluates (normative) on the basis of:
o Efficiency – Is the economy producing what people want at
the least possible cost? (quantifiable)
o Equity – Is the distribution of wealth fair? Are landlords
treating low-income tenants fairly? (non-quantifiable)
o Growth – Increase in total output of the economy. Note:
efficiency gains lead to growth (quantifiable)
o Stability – steady growth, low inflation and full employment
of resources – capital and labor (quantifiable)
x And recommends (normative) courses of action to policy-makers
(presidents, congressmen, etc.)
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