Econ 200 Principles of Microeconomics

Instructor: Melissa Knox knoxm@uw.edu

10/29/2016
1. What is economics?
2. Economic models
3. Syllabus and administrative details
4. Using graphs
Have you ever had to make a tradeoff in your life?

What about your parents?

What are you giving up to be here right now?

What Is Economics?
People make choices as they try to attain their goals. Choices are
necessary because we live in a world of scarcity.

Scarcity: A situation in which unlimited wants exceed the limited

resources available to fulfill those wants

Economics is the study of these choices.

Economists study these choices using economic models, simplified

versions of reality used to analyze real-world economic situations.
Typical “Economics” Questions
We will learn how to answer questions like these:

• How are the prices of goods and services determined?

• Why does government control the prices of some goods and

services, and what are the effects of those controls?

But you can also use economics to answer questions like…

• Why do people have so many (or so few) children?

• How do people choose between hours spent working and

hours spent relaxing?
Three Key Ideas

Idea 1: People Are Rational

Rational: Using all available information to achieve your goals.

Rational consumers and firms weigh the benefits and costs of each
action and try to make the best decision possible.

Example: Microsoft doesn’t randomly choose the price of its Windows

software; it chooses the price(s) that it thinks will be most profitable.
Three Key Ideas
Idea 2: People Respond to Economic Incentives

Example: Changes in several factors have resulted in increased

obesity in Americans over the last couple of decades, including:

• Decreases in the price of fast food relative to healthful food

• Increased availability of health care and insurance, protecting

people against the consequences of their actions
Three Key Ideas
Idea 3: Optimal Decisions Are Made at the Margin

Marginal cost and benefit (MC and MB): the additional cost or
benefit associated with a small amount extra of some action.

Example: Should you watch an extra hour of TV, or study instead?

• What are the benefits of an extra hour of TV?

• What are the costs (i.e. the benefits of studying instead)?

(Comparing MC and MB is known as marginal analysis.)

Economic Models
Economists develop economic models to analyze real-world issues.

Building an economic model often follows these steps:

1. Decide on the assumptions to use in developing the model.

2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data well.
Important Features of Economic Models

• Assumptions and simplifications

• Testability

• Economic variables
The Scientific Nature of Economics

When analyzing human behavior, we can perform:

• Positive analysis: the study of “what is?”; and/or

• Normative analysis: the study of “what ought to be?”

Economists generally perform positive analysis.

We try to mimic natural scientists, but people are complicated!!

Ex: Should Medical School Be Free?
Forecasts indicate a significant shortage of doctors, especially
primary care physicians, by 2020.

Would more people become primary care physicians if medical

school were free? And if so, would it be worth the cost?

Economic models can find answers to the positive aspects of

this debate.
Microeconomics and Macroeconomics

Microeconomics is the study of

• how households and firms make choices,
• how they interact in markets, and
• how the government attempts to influence their choices

Macroeconomics is the study of the economy as a whole, including

topics such as inflation, unemployment, and economic growth.
Syllabus and Administrative Details
Class website: https://canvas.uw.edu/courses/1064538
(should access MyEconLab from here)

Check website for: Full syllabus, all course announcements, TA

information, daily reading assignments, lecture notes (try to put
up 24 hours in advance)

Check MyEconLab for: Weekly homework assignments

(including one due Monday)

Class recordings also available via panopto

Syllabus and Administrative Details
Syllabus and Administrative Details
Syllabus details:

Homework 15% (due every Monday at midnight)

Writing Assignments 12% (3 assignments)
Class Participation 9%
Midterm Exams 64% (Nov 1 and Dec 8, in class)
Syllabus and Administrative Details
Homework:

• Do online in MyEconLab
• Due every Monday at midnight, based on work from previous
week (except last assignment due Wednesday 12/07).
• HW 1 due 10/03 @ midnight (but have access until 3 am
10/04)
• No late assignments, but lowest score will be dropped
• Get two chances – score is best of two (look for “similar
exercise” as 2nd chance)
Syllabus and Administrative Details
Syllabus and Administrative Details
Syllabus and Administrative Details
Exams:

• Two midterms
• No early exams
• No graphing calculators or iphones – please purchase or
borrow a simple calculator
• Practice exams are online.
Syllabus and Administrative Details
Class Participation:

• First Learning Catalytics exercise will be available from today

until Monday night.
• We will do in-class exercises beginning 10/04
• Please bring device (smart phone, tablet, laptop) to every
class – see me if this is an issue
• Please sign up for “Learning Catalytics” and sign in during
every class
• I will drop 4 lowest scores to account for absences and
technical problems.
Syllabus and Administrative Details
Syllabus and Administrative Details
Syllabus and Administrative Details
Academic Integrity:

• No graphing calculators or internet-capable devices during

exams
• All notes and books put away during exams (better yet, leave
them at home)
• No hats
• No bathroom breaks – must leave phone with us in case of
emergency
• All of my exams are closed notes and closed neighbor
• Papers submitted through turnitin antti-plagiarism software
• I can (and have) give a zero for the course if you are caught
cheating!
Syllabus and Administrative Details
No laptops!

It is distracting to me and to your fellow students when you are

online or texting during class. Please keep your devices off
unless we are doing an exercise.

Studies show you learn better when you take notes by hand.
Also, all lecture notes will be online before class.
Syllabus and Administrative Details
Section:

Please attend section Friday to make sure that you can use
myeconlab and learning catalytics (you will have exercises in
each).

Future sections: 3 pop quizzes over the course of the quarter

based on lecture and contribute to participation grade.
Graphs of Two Variables

The price of pizza is on the

vertical axis (or y-axis) and the
quantity of pizza sold per week
along the horizontal axis (or x-
axis).
Calculating the Slope of a Line

Because the slope of a

straight line is constant,
we can use any two
points in the figure to
calculate the slope of
the line.
Calculating the Slope of a Line

Change in value on the vertical axis ∆y Rise

Slope = = =
Change in value on the horizontal axis ∆x Run
Calculating the Slope of a Line—continued
For example,
when the price of
pizza decreases
from $14 to $12,
the quantity of
pizza demanded
increases from 55
per week to 65
per week. Calculating the Slope of a Line

Change in value on the vertical axis ∆y Rise

Slope = = =
Change in value on the horizontal axis ∆x Run

∆Price of pizza ($12 − $14) − 2

Slope = = = = −0.2
∆Quantity of pizza (65 − 55) 10
Correlation vs. Causation

Using graphs to draw conclusions about cause and effect is

dangerous.
In panel (a), as the number of fires in fireplaces increases, the
number of leaves on trees falls; but the fires don’t cause the leaves
to fall.
In panel (b), as the number of lawn mowers being used increases, so
does the rate at which grass grows.
Slopes of Nonlinear Curves
A nonlinear curve has
different slopes at different
points.

We can approximate its

slope over a section by
measuring the slope as if
that section were linear.

Between C and D, the

slope is greater than
between A and B.
Slopes of Nonlinear Curves—continued
Another way to measure the
slope of a nonlinear curve is
to measure the slope of a line
that is tangent to the point
where we want to know the
slope.

∆Cost 75
= = 75
∆Quantity 1

∆Cost 150
= = 150
∆Quantity 1 The Slope of a Nonlinear Curve
Formula for a Percentage Change
One important formula is the percentage change, which is the change
in some economic variable, usually from one period to the next,
expressed as a percentage.

Value in the second period − Value in the first period

Percentage change = × 100
Value in the first period
 Refer to the graph below. What is the absolute value of
the slope of this line?

a. Five.
b. One fifth.
c. One.
d. There is insufficient information to compute the slope
of this line.