Econ1001 day1 :Introduction to Microeconomics

Introduction to Microeconomics
Professor Gordon MacAulay and
Dr Tran Van Hoa

T h e U n iv e r s ity o f S y d n e y

1


Introduction
• Welcome to Microeconomics 1001
• Emeritus Professor Gordon MacAulay
• Dr Tran Van Hoa
• Lectures from 7.00am to 10.45 am
• Tutorials from 2.00 pm to 4.30 pm in groups
2


What is Economics?
• The study of scarcity and how people can
efficiently consume what they want
• A cup of coffee
• The traffic jam—congestion
• The study of markets and how they work.
3


What is Economics
• Systems of production and consumption
• Old ideas—the ‘neoclassical’ view
– Mid 18th C to late 20th C

– Location important, transport was slow/costly

• The ‘new’ economy has manufacturing
and supply of raw materials much less
important—services and communication
4


What is Economics?
• Adam Smith, 1776
– “Theory of Moral Sentiments”
– Comparative advantage
– Advantages of specialisation
– Advantages of free trade

Adam Smith

• David Ricardo, 1815
– Higher rents for scarce resources

• Alfred Marshall, 1881
– Businesses locating near each other

5


What is Economics?
• Arthur Pigou, 1932
– Taxes to discourage and prevent negative
impacts of people on each other

Arthur Pigou

• Jane Jacobs, 1960s
– Technological change crossing
national boundaries

6


What is Economics?
• Branches of Economics
– Macroeconomics
• The whole economy—the national economy
• For example, GDP, CPI

– Microeconomics
• The behaviour of firms, households and consumers
• The behaviour of markets

7


What is Economics
• Key Ideas of Neoclassical Economics
– Scarcity—resources insufficient to meet wants
– Scarcity of income

• Opportunity cost
– Scarcity implies choices must be made
– Thus something must be given up

– Opportunity cost is the next best alternative

8


Opportunity Cost
• Choices
– Scarcity implies making choices
– Choose one thing in favour of another
• Eg with $4 and icecream or chocolate

– Opportunity cost is the value you place on the
next best alternative

9


Marginal Thinking
• To choose requires considering the costs
and the benefits
• Easiest to think of small changes
• Best to choose an activity so the marginal
benefit equals the marginal cost
– E.g. the more chocolate you eat the poorer
you feel. The additional cost of each block of
chocolate is constant so eventually the
additional benefit equals the additional cost.
10

Sunk Costs
• A Key Assumption
– In making choices economists assume that
decisions already made do not influence
future decisions, i.e. costs are sunk
– In simple terms: “ spilt milk” is spilled for ever

11


Incentives
• Consider a driving over the speed limit
– The chance of being caught and the possible
fine provide an incentive to stay under the
speed
– Alternatively, consider the possibility of a
promotion having you work long hours
– These are incentives and they are refect
marginal benefits and costs
12


A Market
• Market—is people interacting economically
• Two people agreeing to an exchange has
both better off.
• Prices in a market help reflect the value of
the goods or services being exchanged
• Many people exchanging with each other
the same goods and services create a

market price
13


Market Failure
• Markets can be inefficient
• Referred to as market failure
– E.g. firms allowing pollution to go into drinking
water

• Government intervention may be
appropriate where there is market failure

14


Economic Thinking
• Economic research
– Cannot easily experiment with the system
– Hard to measure why decisions are made
• Why does the price of rice vary?
• Why does the exchange rate change?

– Can measure, observe and interpret
• Econometrics makes use of statistical techniques

15


Economic Thinking

• Correlation versus causation
– Variables may move together—correlation
– Is one causing the other?
– Correlation does not mean causation

Correlation of -0.9

16


Economic Theory or Model
• Economic model—an explanation of how
part of the economy works (specific detail)
• Theory—often a more general explanation
of how the economy works (may be more
speculative and could be more general)
• Models and theories are usually a
simplification of the economy
• Max Planck—economics is harder than
physics

17


Economic Theories and Models
• Simplification uses assumptions
• Types of models
– Words
– Numerical tables
– Graphs

– Algebra
– Spreadsheets

Variable 1

– Eg a map simplifies the city so we can use it

Variable 2
Positive relationships


Prediction
• Purpose of models
– Predict
– Analyse

• Ceteris paribus assumption
– All other things equal
– Changing one thing at a time and observing
the consequences

• Changing models over time
– New models evolve all the time
19


Public Policy
•
•
•

•
•

Economics was political economy
Role and policy for government
Making peoples lives better
Laissez faire—Adam Smith
Government ownership & control—Karl Marx
– Market economics
– Command economics—centrally planned
– What is the balance ??????
20


Positive versus Normative
• Positive economics—the way the world is
– Aims to explain why

• Normative economics—the way the world
ought to be
– Recommendations on what governments or
business should do
• Role of the productivity Commission
• Role of the public service
21


Economics as a Science
• Science or partisan policy tool?
– Can be used to argue a case (eg the “Hot

Tub”)
– Need for balance
– Much economics applies the scientific method
•
•
•
•

Hypothesis
Test—accept/reject
Revise
New hypothesis
22


Review
•
•
•
•

Micro versus macro?
Are models useful?
Scarcity—is anything ever “free”?
Is the ceteris paribus assumption a bad
idea?

23

Scarcity and Choice
• Summary
– Scarcity requires choices
– Consumers and producers benefit from
exchange
– Increasing opportunity costs
– Production possibilities
– Economic growth what is it?
– Elements of a market economy
24


Scarcity and Choice
• Choose
– What goods and services to produce?
– What goods and services to consume?

• How would you spend US$100?
– What are your alternatives?

• How would you use tonight?
– What are your alertnatives?

What is the next best
alternative to your
choice?
Opportunity cost?

25