Microeconomics
Lecture 01
Introduction and Math Review
Marginalism
 Average Cost  total cost divided by quantity
 If I spend 300 hours preparing 30 lessons for you, then
my average cost is 10 hours per lesson.
 Sunk Cost  costs that can no longer be avoided because they have already been "sunk"
 If I teach this class again next semester, I will have already sunk 300 hours into preparation.
 Marginal Cost  cost of producing one more unit
 Next semester I can recycle my notes, so my marginal cost per lesson will equal 75 minutes.
 (Compare that with my current 10 hours!)
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Opportunity Cost
 We all face choices because resources are "scarce."
 We cannot spend more time or money than we have,
so we have to give up one opportunity to take advantage of another.
 If I have a choice between earning $1000 per month by teaching this course
OR earning $500 per month by working at McDonald's, then:
 It takes me one month to produce $1000 worth of teaching.
 It takes me one month to produce $500 worth of hamburgers.
 Q: What's my opportunity cost of teaching?
 A: Half a hamburger per unit of teaching.
$$\begin{array}{lll}\frac{\frac{\text{one month}}{\text{\$1000 of teaching}}}{\frac{\text{one month}}{\text{\$500 of hamburgers}}}& =& \frac{\text{\$500 of hamburgers}}{\text{\$1000 of teaching}}\\ \\ & =& \frac{\text{1}}{\text{2}}\cdot \frac{\text{hamburgers}}{\text{teaching}}\end{array}$$
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Math  Tools for Economic Analysis
 point plotting (X,Y):
 the first point in a pair lies on the X axis (horizontal axis)
 the second point in a pair lies on the Y axis (vertical axis)
 The following equation is plotted in red squares:
$$y=5x+20$$
 and its line is drawn by connecting points: (0,20), (1,15), (2,10), (3,5) and (4,0)
 the slope of a line is the change in y divided by the change in x
 y decreases from 15 to 10
when x increases from 1 to 2
 so the slope is 5
$$\frac{\Delta y}{\Delta x}=\frac{1015}{21}=\frac{5}{1}=5$$
 the yintercept is the value of y, when x=0
 y=20 when x=0
 so the yintercept is 20
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 slope is positive if y increases as x increases
 the equation below (and plotted in blue circles) has positive slope:
$$y=4x+1$$
 slope is negative if y decreases as x increases
 the equation below (and plotted in red triangles) has negative slope:
$$y=2x+15$$
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Analyzing Graphs
 Suppose that the relationship between income and consumption is:
$$C=0.60Y+14000$$
 where:
 C = consumption
 Y = income
 The income coefficient (0.60) is the marginal propensity to consume.
 consumption increases as income increases, but
 a $1000 increase in income only increases consumption by $600
 At higher income levels, consumption is less than income.
(Higher income households save).
 At lower income levels, consumption is greater than income.
(Lower income households dissave).
 Along the 45 degree line, income equals expenditure.
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A Few More Definitions
$$C=0.60Y+14000$$
 Model  formal statement of a theory (often presented mathematically)
 Variable  a measure that can change (for example: income and consumption)
 dependent variable
 independent variable
 In the example above, consumption depends on income.
 Parameters  value which remain constant in an equation (in the example above: 0.60 and 14,000)
$$Y=C+I+G+(XM)$$
 Ceteris Paribus  "all else equal"
 How does an increase in investment, I, affect national income, Y?
 To determine the effect of investment alone (on income), we must hold all other variables constant.
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Micro vs. Macro
Microeconomics
 Studies the decisionmaking of individuals, households and firms
 Studies the distribution of wealth and income
Macroeconomics
 Studies the behavior of the economy as a whole
 Explores the factors that affect:
 Gross Domestic Product
 the price level
 the unemployment rate
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Positive vs. Normative Economics
Positive
 No judgements
 Just asking how the economy operates
Normative
 Makes judgements
 Evaluates the outcomes of economic behavior
 Makes policy recommendations
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Economic Policy
 Positive  economic policy starts with positive theories and models to develop an understanding of how the economy works
 Then economic policy normatively evaluates outcomes on the basis of:
 Efficiency 
Is the economy producing what people want at the least possible cost?
 Equity 
Is the distribution of wealth fair?
 Growth 
Increase in total output of the economy.
 Stability 
steady growth, low inflation and full employment
 And recommends (normative) courses of action to policymakers (presidents, congressmen, etc.)
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