2022.0906 Microeconomics Basics

Microeconomics
Microeconomics Basics
（Mankiw Chapter 1&2）
1
學習目標
➢After this class, you are expected to know:

⚫ Ten Principles of Economics
⚫ What scarcity is
⚫ What the production possibilities curve represents
⚫ The three core economic questions that every society
must answer
⚫ The difference between market and government
approaches to economic problems
2
What is Economics?
Resources are scarce
Economics is the study of how society manages its
scarce resources
➢ How people make decisions

➢ How people interact with one another
➢ How the economy as a whole works
3
Fields in Economics
◆ Micro ◆ International
◆ Macro ◆ Development
◆ Econometrics ◆ Comparative
◆ Finance ◆ Law and Economics
◆ Industrial Organization
◆ Political Economy
◆ Labor
◆ Economic History
◆ Public Finance
4
Why Study Economics?
◆ Economics will help you understand the world

in which you live.
◆ Economics will make you a more astute
participant in the economy.
◆ Economics will give you a better understanding
of the potential and limits of economic policy.
5
A New Way of Thinking
▪ Economics is a subject in which a little

knowledge goes a long way.
• unexpected reasons
• unintended consequences
• irrelevant factors
• surprising mechanisms
6
Three types of problems in economics
1. How People Make Decisions
2. How People Interact
3. How the Economy as a Whole Works
7
1
Ten Principles of Economics
8
How People Make Decisions
1. People face tradeoffs.

2. The cost of something is what you give
up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
9
How People Interact
5. Trade can make everyone better off.

6. Markets are usually a good way to
organize economic activity.
7. Governments can sometimes improve
market outcomes.
10
How the Economy as a Whole Works
8. The standard of living depends on a country’s

production.
9. Prices rise when the government prints too
much money.
10. Society faces a short-run tradeoff between
inflation and unemployment.
11
1. People face tradeoffs
“There is no such thing as a

free lunch!”
12
1. People face tradeoffs

To get one thing, we usually have to give up
another thing.
Food v. clothing
Leisure time v. work(earnings)
Guns v. butter
13
2. The cost of something is what you give

up to get it
◆ People decide whether to do one thing or not by
considering its costs and benefits.
◆ However, making decisions requires trading off this
thing against other alternatives.
How can we take other alternatives into account when calculate costs and
benefits of just this thing?
The opportunity cost of an item is what you give up to obtain that item.
Opportunity cost: represents the potential benefits an individual, investor,
or business misses out on when choosing one alternative over another.
14
3. Rational people think at the margin

People make optimal decisions by comparing costs and benefits
at the margin.
Marginal changes are small, incremental adjustments to an
existing plan of action.
◆ Why do airlines let employees and their relatives fly for free
after passengers board?
◆ marginal cost v. average cost
◆ Why water is usually cheaper than diamond
◆ marginal benefit vs. total benefit
15
4. People respond to incentives

刺激
Marginal changes in costs or benefits motivate people to

respond.
The decision to choose one alternative over another occurs
when that alternative’s marginal benefits exceed its
marginal costs!
◆ Can people reduce accidents by using seat belts ?
16
5. Trade can make everyone better off
People gain from their ability to trade with one

another.
Competition results in gains from trading.
Trade allows people to specialize in what they
do best.
17

organize economic activity
In a market economy, households decide what to buy
and who to work for.
Firms decide who to hire and what to produce.
Adam Smith made the
observation that households
and firms interacting in
markets act as if guided by an
“invisible hand.”
18

organize economic activity
Because households and firms look at prices when deciding
what to buy and sell, they unknowingly take into account the
social benefits and costs of their actions.
As a result, prices guide decision makers to reach outcomes
that tend to maximize the welfare of society as a whole.
When the government prevents prices from adjusting naturally

to supply and demand, it impedes the invisible hand’s ability to
coordinate the millions of households and firms that make up the
economy.
19
7. Governments can sometimes improve market

outcomes
Market failure occurs when the market fails to allocate
resources efficiently.
Market failure may be caused by an externality, which is the
impact of one person or firm’s actions on the well-being of a
bystander.
Market failure may also be caused by market power, which is

the ability of a single person or firm to unduly influence market
prices.
The invisible hand is even less able to ensure that economic

prosperity is distributed fairly. 20
8. The standard of living depends on a country’s

production
Almost all variations in living standards are explained by
differences in countries’ productivities.
Productivity is the amount of goods and services produced from

each hour of a worker’s time.
Higher productivity  Higher standard of living
21
9. Prices rise when the government prints

too much money
Inflation is an increase in the overall level of

prices in the economy.
One cause of inflation is the growth in the quantity
of money.
When the government creates large quantities of
money, the value of the money falls.
22
10. Society faces a short-run tradeoff between

inflation and unemployment
The Phillips Curve illustrates the tradeoff between
inflation and unemployment:
Inflation  Unemployment
It’s a short-run tradeoff!
23
Any Questions？
24
CONTENTS 1 Scarcity
2 Opportunity Cost
3 Marginal and Production

Possibilities Frontier
4 Economic Growth and the

Production Possibilities Frontier
5 Market and government

functions
25
1 Scarcity
26
1.Scarcity
➢Limited resources
➢Endless desire
➢Scarcity: Limited resources cannot satisfy infinite desires.
➢Three economic problems caused by scarcity
⚫Produce?
⚫How to produce?
⚫Produced for whom?
27
2 Opportunity Cost
28
2.Opportunity Cost
The opportunity cost of an item is what you give up

to obtain that item.
Opportunity cost: represents the potential benefits
an individual, investor, or business misses out on
when choosing one alternative over another.
29
2.Opportunity Cost
Discussion 1
What is the opportunity cost of studying at universities?
-Resources needed: Time + Money

-Things you gave up when you choose to go to
universities:
Money (tuition fee, costs of book etc) + Time (you may
give up your working opportunities, family time, relax)
The opportunity cost of studying at universities is the value
of the best available alternative that you may/have given up
30
2.Opportunity Cost
Practice 1
Q: All of the following are part of the opportunity costs of
going to college EXCEPT:
A. The money spent on tuition

B. Interest payments on student loans
C. Money spent on textbooks
D. Foregone wages given up to attend college
E. Money spent on clothes
Answer: E
31
2.Opportunity Cost
Practice 2
Q: Consider Ben who works for $15 an hour. Instead of
working one day, he went to watch a movie that costs $35 and
lasts two hours. Decide which of the following statements is
true?
A.The opportunity cost of watching the movie is $30 for two hours
of work.
B.The opportunity cost of watching the movie is $65 for two hours
of work.
C.The opportunity cost of working is $30 for two hours of movie.
D.The opportunity cost of working is $50 for two hours of movie.
Answer: A
32
Any Questions？
33
3 Margin and Production
34
3 . M a r g i n a n d P ro d u c t i o n P o s s i b i l i t i es F ro n t i e r
3.1 Margin
☆Rational
-People who systematically and purposefully do the
best they can to achieve their objectives.
☆Marginal change
- A small incremental adjustment to a plan of action.
35
3.2 Production Possibilities Frontier (PPF)
PPF is a graph that shows the combinations of

output that the economy can possibly produce
given the available factors of production and the
available production technology
36

➢ 50,000 hours of labor totally
➢ It takes 100 hours of labor to produce a computer
➢ It takes 10 hours of labor to produce one ton of wheat
Production possible
Labor combinations
Computer Wheat Computer Wheat
37
小麦
Wheat
生產
Production (吨)
圖上
Point
6,000
的點電腦
Computer 小麥
Wheat E
5,000
A 500 0 D
4,000
C
B 400 1,000 3,000
C 250 2,500 2,000
B
D 100 4,000 1,000
A
E 0 5,000 0
0 100 200 300 400 500 600
电脑
Computer
38
小麦
➢ all points on the production Wheat
(吨)
possibilities frontier 6,000
➢ - Efficient production points E
5,000
➢ - eg points A to E. D
4,000
➢ production efficiency
3,000 C
➢ - All resources are fully utilized.
2,000
➢ - If you want to produce more of B
a certain product, you must 1,000
A
produce less of the other product. 0
0 100 200 300 400 500 600
电脑
Computer
39

Discussion 2
小麦
➢ If the point below the Wheat
(吨)
production possibilities 6,000
frontier
5,000
➢ - Point F: 100 computers, 4,000
3000 tons of wheat
3,000
➢ Is it possible? F
2,000
➢ The result is possible, but
1,000
inefficient.
0
0 100 200 300 400 500 600
电脑
Computer
40

Discussion 3
小麦
Wheat
➢ If the point above the (吨)
production possibilities 6,000
frontier 5,000
➢ - Point G: 300 computers, 4,000
3000 tons of wheat
3,000
➢ Is it possible? G
2,000
➢ The result is impossible. 1,000
Because they don’t have enough
resources. 0
0 100 200 300 400 500 600
电脑
Computer
41
Any Questions？
42
4 Economic Growth and
the Production
43
4.Economic Growth and the Production Possibilities Frontier
The shape of the production possibilities frontier

➢ The production possibilities frontier can be a
straight line or a curved line.
➢ Its shape depends on how much the opportunity cost
changes when resources are shifted from one
industry to another.
➢ If the opportunity cost is constant, the production
possibilities frontier is a straight line
➢ If the opportunity cost increases with the quantity
produced, the production possibilities frontier is a
curve.
44
小麦
Wheat
➢ Additional resources or (吨)
technological advancements
6,000
- Increased production
capacity 5,000
- The economy can produce
4,000
more computers, wheat, or a
combination of the two 3,000
items.
2,000
➢ Economic growth shifts 1,000
the production
possibilities frontier to the 0
right. 0 100 200 300 400 500 600
电脑
Computer
45
➢ The economy can produce

any combination on or inside
the frontier.
➢ Points outside the frontier are
not feasible given the
economy’s resources.
➢ The slope of the production
possibilities frontier measures
the opportunity cost of a car
in terms of computers.
➢ This opportunity cost varies,
depending on how much of
the two goods the economy is
producing.
46
Practice 3
Q: What is a production possibilities curve?
A.A curve on a graph that shows whether the economy is
in full employment or not
B. A curve on a graph that shows how much you can
produce of three or more different goods
C. A curve on a graph that shows production possibilities
for an economy
D.None of these is correct
Answer: C
47
Practice 4
Q: One of the controversies surrounding America's
energy markets is the trade-off between energy
production and clean air. Assuming clean air has value,
the United States will be on its production possibility
frontier if and only if:
A. Resources used to produce clean air and energy are not
being fully utilized
B. Pollution is eliminated
C. The price of energy is relatively low
D. Resources used to produce clean air and energy are being
fully utilized
Answer: D 48
Practice 5
Q: Please answer the following
questions based on the graph
provided.
a) What is the opportunity cost of
increasing the production of
boats from 4000 to 9000?
b) If the production of boats
increases its production, the
production of trucks must
decrease. Why?
Answer: 5000 trucks
The resources are limited and thus must be shifted or diverted
from the production of trucks to boats.
49
Practice 6
Q: Provided that other factors remain the same, which of
the following would shift an economy's production
possibilities curve to the left?
A. The country discovers a new energy source
B. The country experiences a major natural disaster affecting
its capital goods
C. An increase in the social security retirement age
D. Dramatic increases in economic growth
Answer: B
50
Practice 7
Based on the information in the picture, answer
the following questions
1.Production Possibilities Frontier PP1 is moved
to Production Possibilities Frontier PP2.
This movement represents an increase or
Mop
decrease in production capacity?
2. Point A represents
A) It is not efficient.
B) It cannot reach.
C) Resources are used effectively.
D) If you want to produce more Mops, you
must produce less Brooms.
3. On the production possibilities frontier PP2,
the movement from point F to point D results in:
A) Resources flow from Mop to Broom .
B) The workforce producing Brooms is O
permanently unemployed. Broom
C) Resources flow from Broom to Mop.
D) Production is more efficient.
51
Practice 7 Answer
1.Production Possibilities Frontier PP1 is
moved to Production Possibilities
Frontier PP2.
Mop
This movement represents an increase
or decrease in production capacity?
As production capacity increases, the

production possibilities frontier goes from
PP1 moved up to PP2.
O
Broom
52
Practice 7 Answer
2. Point A represents
A) It is not efficient.
B) It cannot reach.
C) Resources are used effectively. Mop
D) If you want to produce more Mops,
you must produce less Brooms.
ANSWER: A
Broom
53
Practice 7 Answer
3. On the production possibilities frontier PP2,
the movement from point F to point D
results in:
Mop
A) Resources flow from Mop to Broom .
B) The workforce producing Brooms is
permanently unemployed.
C) Resources flow from Broom to Mop.
D) Production is more efficient.
✓ ANSWER: C
O
Broom
54
Practice 8
1. Which points represent the efficiency of
production?
2. From point D to point G, the opportunity cost is
___.
A) CA unit Food. Food
B) KL unit Clothing.
C) AB unit Food.
D) OL unit Clothing.
3. From point D to point G, the benefit is ___.
A) CA unit Food.
C) AB unit Food.
O
4. From point J to point D, the opportunity cost is
Clothing
___.
55
Practice 8 Answer
1. Which points represent the efficiency of production?
✓ ANSWER: D, G, and J
56
Practice 8 Answer
2. From point D to point G, the opportunity cost
is ___.
C) AB unit Food.
ANSWER: C) AB unit food.

• From point D to point G, Clothing
increases KL units, while food
O
decreases AB units.
• In other words, to produce KL units
Clothing
of Clothing, they have to give up
the production of AB units of food.
57
Practice 8 Answer
3. From point D to point G, the benefit is
___.
C) AB unit Food.
ANSWER: B) KL unit Clothing.

• From point D to point G, O
Clothing increased KL units,
Clothing
while Food decreased AB
units.
58
Practice 8 Answer
4. From point J to point D, the

opportunity cost is ___. Food
• ANSWER: KM unit clothing.

• From point J to point D,
Clothing reduces KM units,
while food increases AC units.
O
Clothing
59
Any Questions？
60
5 Market and
government functions
61
5.Market and government functions
For resource allocation, which is more important
between the function of the government and the
market more important?
➢ It depends on the situation.
➢ Adam Smith emphasized the importance of the
market as the invisible hand.
➢ Marx believed that the government should own all the
resources and distribute them centrally to avoid social
injustice.
➢ Keynes advocated that the government should actively
intervene in the market at certain times, but should
limit its influence in peacetime.
62
Any Questions？
63
Homework
1. Conceptual questions
1.1 Opportunity cost
1.2 Scarcity
1.3 Production Possibilities Frontier
Production
2. Based on the information in the picture, answer the
following questions:
2.1 Which point does economic unit use only part of its
resources?
2.2 Which point does this economic unit make full use of
all its resources?
2.3 Which point is inefficiency?
2.4 Which point is impossible?
64
Thank you for listening.
65

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Microeconomics

➢After this class, you are expected to know:

➢ How people make decisions

◆ Economics will help you understand the world

▪ Economics is a subject in which a little

1. How People Make Decisions

2. How People Interact

3. How the Economy as a Whole Works

How People Make Decisions

1. People face tradeoffs.

How People Interact

5. Trade can make everyone better off.

How the Economy as a Whole Works

8. The standard of living depends on a country’s

1. People face tradeoffs

“There is no such thing as a

1. People face tradeoffs

2. The cost of something is what you give

3. Rational people think at the margin

4. People respond to incentives

Marginal changes in costs or benefits motivate people to

◆ Can people reduce accidents by using seat belts ?

5. Trade can make everyone better off

People gain from their ability to trade with one

6. Markets are usually a good way to

6. Markets are usually a good way to

When the government prevents prices from adjusting naturally

7. Governments can sometimes improve market

Market failure may also be caused by market power, which is

The invisible hand is even less able to ensure that economic

8. The standard of living depends on a country’s

Productivity is the amount of goods and services produced from

Higher productivity  Higher standard of living

9. Prices rise when the government prints

Inflation is an increase in the overall level of

10. Society faces a short-run tradeoff between

3 Marginal and Production

4 Economic Growth and the

5 Market and government

➢Scarcity: Limited resources cannot satisfy infinite desires.

➢Three economic problems caused by scarcity

⚫Produced for whom?

The opportunity cost of an item is what you give up

-Resources needed: Time + Money

A. The money spent on tuition

- A small incremental adjustment to a plan of action.

3.2 Production Possibilities Frontier (PPF)

PPF is a graph that shows the combinations of

3.2 Production Possibilities Frontier (PPF)

Computer Wheat Computer Wheat

3.2 Production Possibilities Frontier (PPF)

3.2 Production Possibilities Frontier (PPF)

3.2 Production Possibilities Frontier (PPF)

3.2 Production Possibilities Frontier (PPF)

The shape of the production possibilities frontier

➢ The economy can produce

As production capacity increases, the

ANSWER: C) AB unit food.

ANSWER: B) KL unit Clothing.

4. From point J to point D, the

• ANSWER: KM unit clothing.

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