Basic-Microeconomics

Module 1: Economic Thinking

Understanding Economics and Scarcity

• Scarcity means that there are never enough resources to satisfy all
human wants.
• Every society, at every level, must make choices about how to use its resources.
• Economics is the study of the trade-offs and choices that we make, given
the fact of scarcity.
• Opportunity cost is what we give up when we choose one thing over
another.
Goods and Resources

• Economic Goods: goods or services a consumer must pay to obtain; also

called scarce goods.
• Free Goods: goods or services that a consumer can obtain for free
because they are abundant relative to the demand.
• Productive Resources: the inputs used in the production of goods and
services to make a profit: land, economic capital, labor, and
entrepreneurship; also called “factors of production”
Productive Resources
Four productive resources also
called factors of production:
• Land: any natural resource,
including actual land, but also
trees, plants, livestock, wind,
sun, water, etc.
• Economic capital: anything
that’s manufactured in order to • Labor: any human service—
be used in the production of physical or intellectual. Also
goods and services. Note the referred to as human capital.
distinction between financial
capital (which is not productive) • Entrepreneurship: the ability
and economic capital (which is). of someone (an entrepreneur)
While money isn’t directly to recognize a profit
productive, the tools and opportunity, organize the other
machinery that it buys can be. factors of production, and
accept risk.
Concept of Opportunity Cost

Opportunity Cost: the value of the next best alternative.

• Individual Decisions: In some cases, recognizing the opportunity cost can alter
personal behavior.
• Societal Decisions: Opportunity cost comes into play with societal decisions.
Universal health care would be nice, but the opportunity cost of such a decision
would be less housing, environmental protection, or national defense. These trade-
offs also arise with government policies.
Labor, Markets, and Trade

The Division and Specialization

of Labor
• division of labor: the way in which
the work required to produce a good
or service is divided into tasks
performed by different workers.
• specialization: when workers or
firms focus on particular tasks for
which they are well suited within the
overall production process.
Why the Division of Labor
Increases Production
• economies of scale: when the
average cost of producing each
individual unit declines as total
output increases.
Labor, Markets, and Trade (cont.)

Trade and Markets

• Specialization only makes sense if
workers (and other economic agents
such as businesses and nations) can use
their income to purchase the other
goods and services they need.
• Specialization requires trade.
• The market allows you to learn a
specialized set of skills and then use the
pay you receive to buy the goods and
services you need or want.
• This is how our modern society has
evolved into a strong economy.
Microeconomics and Macroeconomics

Micro vs. Macro

• Macroeconomics: the branch of economics that focuses on broad issues
such as growth, unemployment, inflation, and trade balance.
• Microeconomics: the branch of economics that focuses on actions of
particular agents within the economy, like households, workers, and
businesses. We learn about the theory of consumer behavior and the
theory of the firm.
Understanding Microeconomics

Questions to Ask with Microeconomics

• What determines how households • How do people decide

and individuals spend their whether to work, and if so,
budgets? whether to work full time or
part time?
• What combination of goods and
services will best fit their needs • How do people decide how
and wants, given the budget they much to save for the
have to spend? future, or whether they
should borrow to spend
beyond their current
means?
Understanding Microeconomics (cont.)

More Microeconomics Questions

• What determines the • What determines how
products, and how many of many workers it will hire?
each, a firm will produce and • How will a firm finance its
sell? business?
• What determines what prices • When will a firm decide to
a firm will charge? expand, downsize, or even
• What determines how a firm close?
will produce its products?
Understanding Macroeconomics

Macroeconomics: Macroeconomic policy pursues its goals

through monetary policy and fiscal policy.

• Monetary Policy: policy that involves altering the level of interest rates,
the availability of credit in the economy, and the extent of borrowing

• Fiscal Policy: economic policies that involve government spending and

Using Economic Models

Economic Model: a simplified version of reality that allows us to observe,

understand, and make predictions about economic behavior.
Economic Models and Math
• Economic models can be represented using words or using mathematics.
• Algebra and graphs are utilized to explain economic models.
Using Economic Models: Examples

Circular Flow Diagram: a diagram

indicating that the economy consists of
households and firms interacting in a goods-
and-services market and a labor market.
• goods-and-services market (also called
the product market), in which firms sell
and households buy.
• labor market, in which households sell
labor to business firms or other employees.
• real world, there are many different
markets for goods and services and
markets for many different types of labor. Note: Economists don’t figure out the solution to a
problem and then draw the graph. Instead, they use
The circular flow diagram simplifies these the graph to help them discover the answer.
distinctions in order to make the picture
easier to grasp.
Purpose of Functions

• Function: a relationship or expression involving one or more variables.

• In economics, functions frequently describe cause and effect.
• The variable on the left-hand side is what is being explained (“the effect”).
• On the right-hand side is what’s doing the explaining (“the causes”).
• Economic models tend to express relationships using economic variables,
such as:
• Budget = money spent on econ books + money spent on music
Solving Simple Equations

Order of Operations Understanding Variables

• When you solve an equation it’s • Variable: a quantity that can assume a
important to do each operation in range of values represented by a letter or
the following order: a symbol.
• Simplify inside parentheses and • For example: y=9+3x
brackets. Working with Variables
• Simplify the exponent.
• When you’re trying to solve an equation
• Multiply and divide from left to right.
with one or more variables, you need to
• Add and subtract from left to right.
isolate the variable.
Lines • What does x equal if y=12?
• In this course the most common
equation you will see is for a line in
graphs: y = b+mx
Creating and Interpreting Graphs

• intercept: the point on a graph where a line

crosses the vertical axis or horizontal axis.
• slope: the change in the vertical axis divided
by the change in the horizontal axis.
• variable: a quantity that can assume a range
of values.
• x-axis: the horizontal line on a graph,
commonly represents quantity (q) on graphs
in economics.
• y-axis: the vertical line on a graph,
commonly represents price (p) on graphs in
economics.
Creating and Interpreting Graphs (cont.)

Equation for a Line: y = mx + b

• In any equation for a line, m is the slope and b is the y-intercept.
Interpreting Graphs in Economics
• It is rare for real-world data points to arrange themselves as a
perfectly straight line.
• It often turns out that a straight line can offer a reasonable approximation
of actual data.
Interpreting Slope

What the Slope Means: the change in

the vertical axis divided by the change in
the horizontal axis.
• positive slope indicates that two
variables are positively related; when
one variable increases, so does the
other, and when one variable decreases,
the other also decreases.
Interpreting Slope: Negative Slope

What the Slope Means: the

change in the vertical axis divided by
the change in the horizontal axis.
• negative slope indicates that two
variables are negatively related;
when one variable increases, the
other decreases, and when one
variable decreases, the other
increases.
Interpreting Slope: Slope of Zero

What the Slope Means: the

change in the vertical axis divided
by the change in the horizontal
axis.
• Slope of zero indicates that
there is a constant relationship
between two variables: when
one variable changes, the other
does not change.
Interpreting Slope: Calculating Slope

Calculating Slope
• The slope of a straight line between two
points can be calculated in numerical terms.
• To calculate slope, begin by designating one
point as the “starting point” and the other
point as the “end point” and then calculating
the rise over run between these two points.
Interpreting Slope: Calculating Slope (cont.)

Calculating Slope
• Graphs of economic relationships are not always straight lines but often
nonlinear (curved) lines.
• Can interpret nonlinear relationships similarly to the way we interpret linear
relationships.
• Their slopes can be positive or negative. We can calculate the slopes similarly also,
looking at the rise over the run of a segment of a curve.
Interpreting Slope: Nonlinear Relationships

Nonlinear relationships can be

interpreted similar to linear relationships.
• Their slopes can be positive (as in
Figure 5) or negative.
• We can calculate the slopes similarly
also, looking at the rise over the run of
a segment of a curve.
• A higher positive slope means a steeper
upward tilt to the curve, which you can
see at higher output levels.
• A negative slope that is larger in
absolute value (that is, more negative)
means a steeper downward tilt to the
line.
Interpreting Slope: Nonlinear Relationships
(cont.)
Nonlinear relationships can be interpreted
similar to linear relationships.
• A slope of zero is a horizontal line.
• A vertical line has an infinite slope.
• If a line has a larger intercept, graphically, it
would shift out (or up) from the old origin,
parallel to the old line.
• If a line has a smaller intercept, it would shift in
(or down), parallel to the old line.
Types of Graphs: Line

Line Graphs: show a relationship

between two variables: one
measured on the horizontal axis
and the other measured on the
vertical axis.
• Sometimes it’s useful to show
more than one set of data on
the same axes.
• The data in the table, below, is
displayed in Figure 1, which
shows the relationship between
two variables: length and
median weight for American
baby boys and girls during the
first three years of life.
Types of Graphs: Line (cont.)

Line Graphs:
• The line graph measures length in inches
on the horizontal axis and weight in
pounds on the vertical axis. For example,
point A on the figure shows that a boy
who is 28 inches long will have a median
weight of about 19 pounds.
• One line on the graph shows the length-
weight relationship for boys, and the
other line shows the relationship for girls.
• This kind of graph is widely used by
health-care providers to check whether a
child’s physical development is roughly
on track.
Types of Graphs: Pie

Pie Graphs: (sometimes called a pie chart)

is used to show how an overall total is
divided into parts. A circle represents a
group as a whole. The slices of this circular
“pie” show the relative sizes of subgroups.
• These pie graphs show how the U.S.
population was divided among children,
working-age adults, and the elderly in
1970, 2000, and what is projected for
2030.
• In a pie graph, each slice of the pie
represents a share of the total, or a
percentage. For example, 50% would be
half of the pie and 20% would be one-fifth
of the pie.
Types of Graphs: Pie (cont.)
Pie Graphs:
• The three pie graphs show that the share
of the U.S. population 65 and over is
growing.
• The pie graphs allow you to get a feel for
the relative size of the different age
groups from 1970 to 2000 to 2030,
without requiring you to slog through the
specific numbers and percentages in the
table.
• Some common examples of how pie
graphs are used include dividing the
population into groups by age, income
level, ethnicity, religion, occupation;
dividing different firms into categories by
size, industry, number of employees;
and dividing up government spending or
taxes into its main categories.
Types of Graphs: Bar

Bar Graphs: uses the height of

different bars to compare quantities.
• Bar graphs can be subdivided in a
way that reveals information similar
to that we can get from pie charts.
• It is sometimes easier for a reader to
run his or her eyes across several bar
graphs, comparing the shaded areas,
rather than trying to compare several
pie graphs.
Types of Graphs: Bar (cont.)

Bar Graphs: uses the height of different

bars to compare quantities.
• The three bar graphs are based on the
information from the chart about the U.S.
age distribution in 1970, 2000, and 2030.
• Graph (a) shows three bars for each
year, representing the total number of
persons in each age bracket for each
year.
• Graph (b) shows just one bar for each
year, but the different age groups are
now shaded inside the bar.
• Graph(c), still based on the same data,
the vertical axis measures percentages
rather than the number of persons.
Types of Graphs: Comparison
How do you know which graph to use for your data?
• Bar graphs are especially useful when • Pie graphs are often better
comparing quantities. than line graphs at showing how
• For example, if you are studying the an overall group is divided.
populations of different countries, bar • However, if a pie graph has
graphs can show the relationships too many slices, it can
between the population sizes of become difficult to interpret.
multiple countries.
• Not only can it show these
relationships, but it can also show
breakdowns of different groups
within the population
Types of Graphs: Comparison (cont.)
How do you know which graph to use for your data?
• Line graphs are often the most
effective format for illustrating a
relationship between two variables
that are both changing.
• For example, time-series graphs can
show patterns as time changes, like
the unemployment rate over time.
• Line graphs are widely used in
economics to present continuous
data about prices, wages, quantities
bought and sold, the size of the
economy.
Quick Review

• What if scarcity? Explain its • How are equations and functions

economic impact. used to describe relationships?
• What are productive resources? What are the cause and effects?
• What is opportunity cost and its • What proper order of operations is
importance in decision-making? used while solving simple equations
with variables?
• Why do trade and markets exist?
• How does a graph shows the
• What is the difference between relationship between two variables?
macroeconomics and
microeconomics? • How do you differentiate between a
positive relationship and a negative
• Why are economic models are useful relationship?
to economists?
• How do you interpret economic
• What are common economic models? information on a graph?