Professional Documents
Culture Documents
Id like to introduce you to Marty Thorndecker. Hes an economist but hes really very nice.
Hi, I am Marty.
Hi, I am Marty.
11
13
Microeconomics
The study of how people make choices under conditions of scarcity and of the results of those choices for society. In a market system, allocation of resources occur via the price system, incomes and preferences
14
15
17
18
19
20
21
22
23
24
People often behave as if they were comparing the relevant costs and benefits.
25
People often make bad decisions because they fail to compare the relevant costs and benefits.
26
27
28
29
A rare disease will claim 600 lives if we do nothing. We must choose between the following two programs: Program A: save 200 lives with certainty Program B: save 600 lives with probability 1/3, and save zero lives with probability 2/3
A rare disease will claim 600 lives if we do nothing. We must choose between the following two programs: Program C: 400 people will die with certainty Program D: 1/3 chance that no one will die, and 2/3 chance that all 600 will die
32
Illusions
If the list of alternatives among which we choose are the same in two cases, then the particular alternative we choose should also be the same in both cases.
Yet people seem to prefer the safe alternative when the alternatives are framed as choices between different numbers of lives saved, and to prefer the risky alternative when the alternatives are framed as choices between different numbers of lives lost.
33
You have just arrived at the theater to buy your ticket and discover that you have lost a $100 bill from your wallet.
34
35
In both cases, the additional cost you must incur to see the play is exactly $100.
Since the relevant costs and benefits are the same in both cases, your decision should also be the same.
36
37
Cost-benefit principle:
Buy an additional megabyte if the marginal benefit of RAM is at least as great as its marginal cost.
Marginal benefit = added benefit from having 1 more unit. Marginal cost = added cost of having 1 more unit.
38
Cost-benefit principle:
Dollars per megabyte MB 2.00 Value of an additional megabyte Cost of an additional megabyte
Optimal amount of memory
39
Everyday Choices
"Should I do X?" "How much X should I buy?" "Should I buy an additional unit of X?"
40
41
42
43
In the latter question, y is simply the most highly valued alternative to doing x.
44
45
46
47
48
49
50
51
52
Economic Surplus is the benefit of taking any action minus its cost
The goal of economic decision makers is to maximize their economic surplus.
53
Example 1.12. Is it fair to charge interest when lending a friend some money?
Suppose a friend lends you $10,000, and her primary concern in deciding whether to charge interest is to decide if it would be "fair" to do so. She could have put that same money in the bank, where it would have earned, say, 5 percent interest, or $500 each year. If she charges you $500 interest for each year the loan is out, she is merely recovering the opportunity cost of her money.
If she didn't charge you any interest, it would be the same as giving you a gift of $500/yr.
54
Example 1.13. Is it fair to charge interest when lending a friend some money?
If someone chooses not to give you a gift, is that unfair?
If not, it makes no more sense to say that recovering the opportunity cost of lending someone money is unfair.
55
Opportunity cost
As simple as the opportunity cost concept is, it is one of the most important in microeconomics.
The art in applying the concept correctly lies in being able to recognize the most valuable alternative that is sacrificed by the pursuit of a given activity.
58
59
61
62
63
64
66
Average Cost
($ billion/launch)
Marginal Cost
($ billion/launch)
0 3 7 12 20 32
0 3 3.5 4 5 6.4
4
5 8 12
68
Example 1.16. Should you move one of your boats from the east end to the west end?
Currently two boats are sent to the east end and two to the west end.
Average output per boat Number of boats 1 East end 100 lbs/boat West end 130 lbs/boat
2
3 4
100 lbs/boat
100 lbs/boat 100 lbs/boat
120 lbs/boat
110 lbs/boat 100 lbs/boat
70
Example 1.16. Should you move one of your boats from the east end to the west end?
Average output per boat Number of boats East end West end
1
2 3 4
100 lbs/boat
100 lbs/boat 100 lbs/boat 100 lbs/boat Number of boats
130 lbs/boat
120 lbs/boat 110 lbs/boat 100 lbs/boat
East end 2 3 1 4
West end 2 1 3 0
Total output 440 lbs 430 lbs 430 lbs 400 lbs
400 lbs
71
Example 1.16. Should you move one of your boats from the east end to the west end?
Average output per boat Number of boats 1 2 3 4 East end 100 lbs/boat 100 lbs/boat 100 lbs/boat 100 lbs/boat West end 130 lbs/boat 120 lbs/boat 110 lbs/boat 100 lbs/boat
Marginal output per boat The n-th boat East end West end
1
2 3 4
100 lbs
100 lbs 100 lbs 100 lbs
130 lbs
110 lbs (= 240-130) 90 lbs (=330-240) 70 lbs (400-330)
72
For a resource that is perfectly divisible, and for activities for which the marginal product of the resource is not always higher in one than in the others, the rule is: Allocate the resource so that its marginal benefit is
73
75
Economic Naturalism
Applications Use cost-benefit analysis to explain some pattern of events or behavior you have observed in your own environment
Start simple Repetition and drill Active learning apply to real life phenomena
76
77
78
79
80
81
82
The only foreign films with a chance to make it in the HK market are really good onesthose able to generate strong reviews and word of mouth.
84
End
85