Introduction to Microeconomics
Peng Shen
September 10, 2021
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What is Economics
Scarcity: unlimited wants vs. limited resources
wealth: a long list of wanted products vs. limited wealth
time: study for the final exam or go to a party or watch a game
the scarce resource varies depending on the situation
when you have to make a choice (to give up something), then you are
facing the problem of scarcity
Economics: the study of how to make choices “wisely” (to best attain the
goals given the scarce resource)
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What is Microeconomics?
Microeconomics: the study of how consumers and firms make
choices, how they interact in markets, and how the government attempts
to influence their choices.
Macroeconomics: the study of the economy as a whole, including
topics such as inflation, unemployment and economic growth.
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What is Microeconomics?
Microeconomics: the study of how consumers and firms make
choices, how they interact in markets, and how the government attempts
to influence their choices.
Macroeconomics: the study of the economy as a whole, including
topics such as inflation, unemployment and economic growth.
However, there is no clear cut between the two fields.
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Three questions to answer in Microeconomics
What goods and services will be produced?
How will the goods and services be produced?
Who will receive the goods and services produced?
The answer depends on the type of economy we are in.
Centrally planned economy: the government decides the allocation of
economic resources Food Coupon
Market economy: the decisions of households and firms interacting in
markets allocate economic resources.
Mixed economy: primarily market economy, but the government plays
a role.
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Three fundamental questions in market economy
What, How, Who?
The questions are solved by one variable: price.
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Three fundamental questions in market economy
What, How, Who?
The questions are solved by one variable: price.
In most cases, the markets are productive efficient and allocative efficient.
Productive efficiency occurs when a good or service is produced at
the lowest possible cost
Allocative efficiency occurs when production is in accordance with
consumer preferences
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The government in a mixed economy
Why does the government participate in the market?
to attain equity, the fair distribution of economic benefits
to maximize social welfare
However, “equity” and “social welfare” are sometimes difficult to define.
Example
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The government in a mixed economy
Why does the government participate in the market?
to attain equity, the fair distribution of economic benefits
to maximize social welfare
However, “equity” and “social welfare” are sometimes difficult to define.
Example
It is important to distinguish between positive analysis and normative
analysis.
positive analysis: what is or how something works
normative analysis: what ought to be
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How to analyze economic issues
Economic models: a tool for economic analysis
We want an economic model to
explain the reality as much as possible
be simple enough to be tractable
What we do: making simplified assumptions; However, models are still
powerful to explain economic phenomenon.
An important assumption throughout the course: people are rational.
Rational individuals weigh the benefits and costs of each action, and
they choose an action only if the benefits outweigh the costs.
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Figure 1: Coupon for foods and some consumer goods in Soviet Union
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Figure 2: Thomas Robert Malthus (Feb 13, 1766-Dec
23, 1834) was an English scholar in political economy. He
presented in An Essay on the Principle of Population:
population, when unchecked, increases geometrically and
subsistence increases at best only arithmetically.
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Figure 3: Thanos, in Avengers: Infinity War, wants to
kill half of the universe before the resources of the universe are
exhausted.
Figure 2: Thomas Robert Malthus (Feb 13, 1766-Dec
23, 1834) was an English scholar in political economy. He
presented in An Essay on the Principle of Population:
population, when unchecked, increases geometrically and
subsistence increases at best only arithmetically.
Back
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