Micro Lecture 1.1 - Introduction

WELCOME TO
BUS 700 ECONOMICS
LECTURER:
Atta Adu-Osae
Copyright 2013 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442558069/Hubbard and O'Brien/Essentials of Economics/2e
Assessment Structure
Assessment Type
When Assessed
Weighting
Mid-trimester examination
[Final Exam: Microeconomics]
Week 6
30%
Critical Review Individual Research

Paper on Economics (2,500 words)
Week 10
25%
Final examination
[Macroeconomics]
Final Exam Period
45%
Lecture 1: Chapter
1.1
Economics:
Foundations and
Models
Learning Objectives
1. Define Economics and distinguish
microeconomics and macroeconomics.
between
2. Explain these three important economic ideas:

people are rational; people respond to incentives;
optimal decisions are made at the margin.
3. Understand the issues of scarcity and trade-offs,
and how the market makes decisions on these
issues.
4.
Understand
analysis.
the
role
of
models
in
economic
Microeconomics and macroeconomics

Microeconomics: The study of how households and
firms make choices, how they interact in markets, and
how the government attempts to influence their choices
- Lecture 1 Lecture 6
Macroeconomics: The study of the economy as a
whole, including topics such as inflation,
unemployment, and economic growth - Lecture 7
Lecture 12
What is Economics? Economics and Scarcity
Economics is the study of how scarce, or limited,

resources are used to satisfy unlimited wants and
needs for members of society
Scarcity is the result of not enough goods and
services to satisfy all wants and needs.
In economics we study how people make choices
and interact in markets.
Three Key Economic Ideas

Three important ideas in economics are:
1.
People are rational.
2.
People respond to economic incentives.
3.
Optimal decisions are made at the margin.
Marginal analysis: Analysis that involves

comparing marginal benefits and marginal costs.
Scarcity And Trade-offs

Trade-offs force society to make choices
This is especially true with respect to three

fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services
produced?

1. What goods and services will be produced?
Choice depends on incentives.
Choosing between alternative options means making a

trade-off. Economists use the concept of opportunity
cost.
Opportunity cost is the cost of a purchase or a
decision measured in terms of the highest valued
alternative that must be given up.
Factors of Production
Factors of production are used to create goods and
services.
o Labor
o Land
o Capital
o Entrepreneurship

2. How will the goods and services be produced?
In many cases, firms face a trade-off between using more

workers and using more machines (i.e. Factors of
production).
3. Who will receive the goods and services produced?

Factor Income
Land
Labour Wage
Capital Interest
Entrepreneurship
11
Rent
Profit
Efficiency and equity
Efficiency is producing the largest attainable output of a

desired quality with a given set of resources.
Producing at the lowest possible cost.
Productive efficiency: When a good or service is

produced using the least amount of resources.
Allocative efficiency: When production reflects

consumer preferences; in particular, every good or
service is produced up to the point where the last unit
provides a marginal benefit to consumers equal to the
marginal cost of producing it.
12
Efficiency and equity, cont.

Voluntary exchange: Occurs in markets when both the
buyer and seller of a product are made better-off by the
transaction.
Equity: The fair distribution of economic benefits between
individuals and between societies.
An efficient outcome may or may not be considered by society
to be equitable.
13
Economic Analysis: Models and

Positive & Normative Statements
14
Economics: Foundations and models

Economics is used to answer questions such as
the following:
How are the prices of goods and services determined?
How does pollution affect the economy, and how should
government policy deal with these effects?
Why do firms engage in international trade, and how do
government policies affect international trade?
Why does government control the prices of some goods
and services, and what are the effects of those controls?
15
Economic Models
Positive and normative analysis
Positive analysis: Analysis that is concerned with what
is, and involves value-free statements.
o
Objective and Descriptive
Based on facts
Can be tested or verified
Example:
o
16
The cost of producing cars is lower in Thailand than in

Australia.
Economic Models
Positive and normative analysis
Normative analysis: Analysis that is concerned with what
ought to be, and involves value judgements.
17
Prescriptive and subjective
Not based on facts
Cannot be tested or verified
Example:
The government should spend the budget surplus on

housing for homeless citizens than on fighting imaginary
wars like the war
against terrorism.

Micro Lecture 1.1 - Introduction

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WELCOME TO

BUS 700 ECONOMICS

Critical Review Individual Research

Final Exam Period

2. Explain these three important economic ideas:

Microeconomics and macroeconomics

What is Economics? Economics and Scarcity

Economics is the study of how scarce, or limited,

Three Key Economic Ideas

People are rational.

People respond to economic incentives.

Optimal decisions are made at the margin.

Marginal analysis: Analysis that involves

Scarcity And Trade-offs

This is especially true with respect to three

Scarcity And Trade-offs

Choice depends on incentives.

Choosing between alternative options means making a

Scarcity And Trade-offs

In many cases, firms face a trade-off between using more

3. Who will receive the goods and services produced?

Efficiency and equity

Efficiency is producing the largest attainable output of a

Producing at the lowest possible cost.

Productive efficiency: When a good or service is

Allocative efficiency: When production reflects

Efficiency and equity, cont.

Economic Analysis: Models and

Economics: Foundations and models

Objective and Descriptive

Can be tested or verified

The cost of producing cars is lower in Thailand than in

Prescriptive and subjective

Not based on facts

Cannot be tested or verified

The government should spend the budget surplus on

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