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ECON 103

Microeconomics
• Dr. Malcolm Rutherford
• Office: BEC 340
• Office hours: Monday and
Thursday 2:30-3:30 or by
appointment.
• Office phone: 721-6481
• E-mail: rutherfo@uvic.ca
Econ 103
Microeconomics
• Text
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• Outline
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regulations
Part 1
Basic Concepts and
Models
• Interest in economic problems
• But specific problems and issues
change over time
• General analytic framework—how
to think about any economic
problem
• Abstraction and model building
• Simplified models that capture key
general characteristics
• Empirical testing of models
• Economics and policy
• Positive and normative
Economics
• Economics is about “the economy”
• The way in which individuals and
social groups “make a living”
• Provides the material well being of
individuals and society
• Economics can be defined in terms
of subject matter or in terms of
techniques—choice in the face of
scarcity
• Techniques of economic analysis
sometimes applied to non-economic
subject matter
Economic Systems

• What goods and services to


produce
• How to produce them—
technology, specialization, and
teams
• Where and when to produce
them
• How to distribute them—who
gets how much?
Economic Systems

• The economy and society


• The economy and technology
• The Economy and the natural
world

Nature Economy
Society
Technology
Economic Systems

• Traditional Economies
Hunting and gathering societies
• Command Economies
Ancient Egypt, Ancient China,
Soviet Union
• Market Economies
The growth of market economies
in Europe
• Mixed Economies
The variable place of
government
The Market Economy
• Production and distribution result
largely from individuals pursuing
their own self interest, in the
institutional context of markets
• Specialization and exchange
• Decentralized
• Complex and interdependent
• How does this complex and
decentralized system work, rather
than becoming chaotic?
• Markets provide information and
incentives (prices, profits) and
coordinate economic decisions
• Microeconomics and
Macroeconomics
Basic Concepts:
Scarcity
• Limited resources—land,
labour, capital, and
entrepreneurship
• Unlimited wants
• Scarcity of resources relative to
wants
• Need for choice between
alternative uses of resources
• This leads to the next important
concept: cost
Basic Concepts:
Opportunity Costs
• Cost derives from scarcity and
the need to make choices
• The cost of doing one thing is
what is foregone
• Explicit costs and implicit costs
• The economists’ and the
accountants’ definition of cost
• The implicit cost of capital and
economic profit
Basic Concepts:
Decisions at the Margin
• Some decisions involve all or
nothing choices
• Many decisions involve
decisions at the margin
• How much of something should
I consume or produce?
• Marginal cost and marginal
benefit
• Optimal point where MC=MB
Decisions at the Margin

Optimal rounds of golf per week


for Dr. R.
$
MC

MB

Q* Q
Basic Concepts:
Allocative Efficiency
• Allocative efficiency is where
resources are allocated to their
highest valued use
• Marginal benefit=Marginal cost
• At the margin people value this
good (in terms of willingness to
forego other things) just what it
costs to produce (in terms of
opportunity costs)
• All costs and benefits must be
included
Efficient Use of
Resources
What people What must be
will forego for foregone for an
$ additional unit
an additional
unit
MC

Benefit exceeds Cost exceeds benefits


cost

MB

Q* Q of good X
Basic Concepts:
Incentives
• People tend to respond to
economic incentives
• Price changes
• Opportunities to increase
income or reduce debts
• Changes in incentives vs moral
suasion
• Unintended consequences and
incentives
Basic Concepts of
Interaction
• There are gains from
specialization and trade
• Markets tend to equilibrium
(most of the time)
• Markets tend to lead to
economically efficient
outcomes (most of the time)
• Government intervention can
correct market failures
Some Basic Models:
Production Possibilities
• Production possibility curve
gives a simplified representation
of an economy
• Two goods
• Given resources and technology
• Can use this model to think
about opportunity cost and
concepts of efficiency
Production Possibility
Frontier
With given resources and
technology
Unattainable

Quantity
of PPF
Military
goods Attainable

Quantity of Civilian
goods
Opportunity Cost

• Productive efficiency—on the


PPF
• Tradeoffs along the frontier
• Opportunity cost
• Constant opportunity cost
• Increasing opportunity cost
• Allocative efficiency—where
on the PPF?
Economic Growth
• Economic growth can be represented as an
outward shift in the PPF due to
accumulation of capital or technological
change
Y

X
Some Basic Models:
Gains from Trade
• Without trade a person or nation is
limited to their own domestic
production possibilities curve
• Gains from trade
• Absolute advantage—based on
different costs
• Comparative advantage—based on
different relative costs
• An example of two individuals with
different abilities or endowments
and two activities—hunting for meat
or collecting plants and berries—
each with constant marginal
opportunity costs
Gains from Trade
Absolute Advantage

Meat (kgs) Person 1

1 kg meat costs 2 kgs plants


10 1 kg plants costs .5 kg meat

Meat (kgs) 20 Plants (kgs)


20 Person 2

1 kg meat costs .5 kg plants


1 kg plants costs 2 kgs meat

10 Plants (kgs)
Gains from Trade
Meat (kgs)

Person 2’s ppf


20 b’
Trade line

c
10 Person 1’s ppf
a
b
10 20 Plants (Kgs)

The trade line drawn here assumes terms


of trade of 1:1 and equal division of the
gains from trade
Gains from Trade
Comparative Advantage
Meat Person 1
30 1M=1.33P

Plants
40
Meat
Person 2
20
1M=0.5P

Plants
10
Gains From Trade
• Comparative Advantage
M Assume trade at 1P=1M

30 Person 1
produces 40P and
trades 10

10
P
30 40
M
20 Person 2 produces
20 M and trades 10

10
P
10
Some Basic Models:
Circular Flow
Circular Flow Diagram
expenditures
incomes
Households

factors goods

Factor markets Goods markets

inputs outputs
Firms
Factor sales revenues
payments
The Market Economy
• Individual and households choose
what factors to supply for income
and what goods to spend that income
on
• Firms choose what goods to produce
and what factors to buy in order to
produce them
• Interdependence
• Choice and constraints on choice
• Incentives
• Markets and efficiency
• Market failures

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