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Lecture 1
Lecture 1
Chapter 1
Introductory
Motivation
Understand…analyze…visualize
1.1. Microeconomics
1.1.1. Definition of Economics
1.1.2. Subjects and research methods of Microeconomics
1.1.3. Some basic concepts
Macroeconomics
the study of economywide phenomena,
including inflation, unemployment, and
economic growth
1.1.2. Subject and Method of
Microeconomics
Subjects: study of how households and firms
make decisions and how they interact in markets.
Scientific method:
OBSERVATION,
THEORY, AND MORE OBSERVATION
Role of assumption: Assumptions can simplify the
complex world and make it easier to understand.
Economic model: Economists also use models to
learn about the world. The models are most
often composed of diagrams and equations
Circular-flow diagram:
Factors of Production
Inputs used to produce goods and
services
Land, labor, and capital
The Circular Flow Diagram
MARKETS
Revenue FOR Spending
GOODS AND SERVICES
Goods •Firms sell Goods and
and services •Households buy services
sold bought
FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production
1. Firms: profit
2. Consumers: benefit
3. Government: welfare
1.3. Optimal economic choices
1.3.1. The nature and objectives of
economic choices
2. Thinking at margin:
Economists use the term marginal changes to
describe small incremental adjustments to an
existing plan of action.
Rational people often make decisions by
comparing marginal benefits and marginal
costs.
Principle
The #2: The Cost
opportunity of Something
cost
Is What You Give Up to Get It.
Decisions require comparing costs and benefits of
alternatives.
Whether to go to college or to work?
Whether to study or go out on a date?
Whether to go to class or sleep in?
The opportunity cost of an item is what you give up to
obtain that item.
Think at margin
Quantity of
Steel (Tons)
3,000 D
C
2,200
2,000 A
Production
possibilities
frontier
1,000 B
D
The Production Possibilities Frontier
Quantity of
Steel (Tons)
produce more steel for any given ton of fish
4,000
rotation
3,000
2,100 E
2,000
A