Lecture Overview and Course Structure

Course Organization and Assessment

This course introduces the foundational principles of microeconomics, focusing on how individuals and firms make choices. The course includes lectures, recitations, online homework, quizzes, and optional final assessments. Assignments are divided into 'prepare' and 'assess' types, with the lowest scores dropped. The Economic Learning Center offers free tutoring support.

• Textbook: eTextbook with MyLab for homework and exams.

• Assignments: 12 assess and 16 prepare assignments; lowest scores dropped.

• Quizzes: Paper quizzes during recitation.

• Final Exam: Optional, can improve midterm scores.

The Scope of Economics

What is Economics?

Economics is the study of choices, not just money. It examines how individuals, firms, and governments allocate scarce resources to satisfy unlimited wants.

• Economic Agent: Any group or individual making choices (e.g., consumers, firms).

• Positive Economics: Describes what people actually do (e.g., how many candies are taken from a bowl).

• Normative Economics: Recommends what people ought to do (e.g., everyone should get one candy).

Microeconomics studies the choices of individuals, firms, and governments. Macroeconomics studies the economy as a whole.

Three Principles of Economics

1. Optimization

Making the best possible choice with given information. Individuals weigh costs and benefits to maximize their well-being.

• Budget Constraint: The set of things a person can afford without breaking their budget.

• Opportunity Cost: The value of the best alternative forgone when making a choice.

2. Equilibrium

Occurs when everyone is optimizing; no one can be better off by changing their behavior. In equilibrium, supply equals demand, and markets clear.

• Free-Rider Problem: When individuals benefit from resources without paying for them (e.g., tax evasion, fare evasion).

3. Empiricism

Using data and evidence to test economic theories. Economists rely on empirical analysis to validate models and inform policy.

Optimization and Marginal Analysis

Optimization Techniques

Optimization can be performed using total value or marginal analysis. Both methods yield the same optimal choice.

• Total Value: Total benefit minus total cost.

• Marginal Analysis: Focuses on the change in net benefit when moving from one alternative to another.

Marginal Cost (MC): The change in cost from choosing one alternative over another.

Marginal Benefit (MB): The change in benefit from choosing one alternative over another.

Marginal Net Benefit (MNB): The change in net benefit from choosing one alternative over another.

Principle of Optimization at the Margin: The optimal choice is where .

Steps in Marginal Analysis

1. Translate all costs and benefits into common units (e.g., dollars per month).

2. Calculate the marginal consequences of moving between alternatives.

3. Choose the alternative where moving to it makes you better off, and moving away makes you worse off.

Market Definition and Price Taking

Market Structure

A market is a group of buyers and sellers exchanging a good or service. In perfectly competitive markets, participants are price takers—they accept the market price because their individual actions do not affect it.

• Many buyers and sellers

• Homogeneous products

• Free entry and exit

• Full information

Demand: Law, Curve, and Shifts

Law of Demand and Diminishing Marginal Benefit

The law of demand states that, all else equal, higher prices lead to lower quantity demanded. This is due to diminishing marginal benefit: each additional unit consumed provides less additional satisfaction.

• First unit is valued most highly.

• Subsequent units require lower prices to be purchased.

Demand Curve

The demand curve plots the relationship between price (vertical axis) and quantity demanded (horizontal axis). It is downward sloping, reflecting the inverse relationship between price and quantity demanded.

• Demand Schedule: A table showing quantity demanded at various prices.

• Market Demand Curve: The horizontal sum of all individual demand curves.

Movements Along vs. Shifts of the Demand Curve

• Movement along the curve: Caused by a change in the good's own price.

• Shift of the curve: Caused by changes in non-price factors (e.g., income, tastes, prices of related goods, expectations, number of buyers).

Rightward shift: Increase in demand. Leftward shift: Decrease in demand.

Factors Shifting Demand

• Income: Normal goods (demand rises with income), Inferior goods (demand falls with income).

• Prices of Related Goods: Substitutes (increase in price of one increases demand for the other), Complements (increase in price of one decreases demand for the other).

• Tastes and Preferences

• Expectations

• Number of Buyers

Consumer Surplus

Consumer surplus is the difference between what consumers are willing to pay (WTP) and what they actually pay. It measures the net benefit to consumers from participating in the market.

Supply: Law, Curve, and Shifts

Law of Supply

The law of supply states that, all else equal, higher prices lead to higher quantity supplied. The supply curve is upward sloping.

• Quantity Supplied: The amount sellers are willing to sell at a given price.

• Supply Schedule: A table showing quantity supplied at various prices.

• Supply Curve: Plots the relationship between price and quantity supplied.

• Market Supply Curve: The horizontal sum of all individual supply curves.

Shifts of the Supply Curve

• Input Costs: Higher input costs decrease supply (shift left).

• Government Policies: Taxes and subsidies can shift supply.

• Expectations: Anticipated future prices can affect current supply.

• Number of Sellers

Rightward shift: Increase in supply. Leftward shift: Decrease in supply.

Market Equilibrium

Equilibrium Price and Quantity

Market equilibrium occurs where quantity demanded equals quantity supplied. The equilibrium price is the price at which this occurs.

• Excess Demand (Shortage): Quantity demanded exceeds quantity supplied at a given price; prices tend to rise.

• Excess Supply (Surplus): Quantity supplied exceeds quantity demanded at a given price; prices tend to fall.

Comparative Statics: Shifts in Supply and Demand

When supply or demand shifts, the equilibrium price and quantity change. The direction of change depends on the relative magnitude and direction of the shifts.

• If both supply and demand increase, quantity increases but price change is indeterminate without more information.

• If supply increases more than demand decreases, quantity rises; if demand decreases more, quantity falls.

Price Controls and Market Efficiency

Price Ceilings and Floors

• Price Ceiling: A legal maximum price below equilibrium (e.g., rent control). Leads to shortages.

• Price Floor: A legal minimum price above equilibrium (e.g., minimum wage). Leads to surpluses.

Efficient Allocation Mechanisms

Efficient markets allocate resources to those who value them most. Mechanisms such as auctions reveal willingness to pay and maximize total welfare. Alternatives (e.g., lotteries, rationing) may not achieve allocative efficiency.

Key Terms and Formulas

• Opportunity Cost: The best alternative use of a resource.

• Marginal Cost (MC):

• Marginal Benefit (MB):

• Marginal Net Benefit (MNB):

• Principle of Optimization at the Margin:

Table: Comparison of Demand and Supply Shifters

Examples and Applications

• Bulk Pricing: Electronics sold in bulk at discounts due to diminishing marginal benefit.

• Airline Substitutes: If one carrier raises fares, demand for rivals increases.

• Emergency Scarcity: Sudden demand spikes (e.g., for generators before a hurricane) shift demand right, causing shortages and price spikes.

Additional info:

• Some context and definitions have been expanded for clarity and completeness.

• Table entries and some examples are inferred from standard microeconomics content.