Principles of Microeconomics

Chapter 1 The Scope and Method of Economics

1.3 The Scope of Economics

Microeconomics:• the study of how households and firms make

choices, • how they interact in markets, • and how the government attempts to

influence their choice.

Macroeconomics: the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

1.4 The Method of Economics1)Positive economics: is concerned with what is. It attempts to understand behavior and the

operation of systems without making judgments.

It describes what exists and how it works.

2)Normative economics: is concerned with what ought to be. It evaluates outcomes of economic behavior

as good or bad. It involves judgments and prescriptions.

1.4 The Method of EconomicsSome Examples If two office-supply firms emerge, will the price of office

supplies increase? --Positive economics

Should a nation reduce the size of its government? --Normative economics

What would happen if we abolished the corporate income tax?

--Positive economics Should we abolish the corporate income tax? --Normative economics

1.4 The Method of Economics

3)Descriptive economics: a version of positive economics that uses data & statistics to support all claims e.g. ATUS --Positive economicsATUS – American Time Use Surveyhttps://www.atusdata.org/index.shtml

1.4The Method of Economics4)Ceteris Paribus ( all else equal) : all other things being equal. It is used to try and single out the effect attributed to a change in a single variable

Example1- what would my grade have been if I studied one more hour, ceteris paribus?

i.e. If I slept the same amount, ate the same cereal, parked in the same spot…

1.4 The Method of Economics Example 2: The relationship between the price

of apples and the quantity of apples purchased

• The quantity of apples purchases depends on many other variables, including the consumer’s income

• So, assumer that the consumer’s income and anything else that influences apple purchases doesn’t change – Ceteris Paribus

1.5 Common FallaciesThe Post Hoc Fallacy: a common error made in thinking about causation: if event A happens before event B, it is not necessarily true that A caused B.

The form: 1. A occurs before B 2. Therefore A is the cause of B

1.4 Common FallaciesThe Post Hoc Fallacy EX 1: John is scratched by a cat while visiting

her friend. Two days later she comes down with a fever. John concludes that the cat's scratch must be the cause of her illness.

EX 2: Peter purchases a new Mac and it works fine for months. He then buys and installs a new piece of software. The next time he starts up his Mac, it freezes. Peter concludes that the software must be the cause of the freeze.

1.4 Common FallaciesThe fallacy of Composition: to conclude that what is true for a part is necessarily true for the whole.

Example: A tiger eats more food than a human being. Therefore, tigers, as a group, eat more food than do all the humans on the earth

1.5 Economic PolicyEfficiency will be a major theme for the course that will be developed in many contexts such as

Consumer/producer problems Perfect competition Market and government intervention

For now, consider efficiency as something that provides the greatest benefit (utility, profit, welfare) while incurring the smallest cost (harm, expenditure, loss)

1.5 Economic PolicyEquity means fairness. It has implications with normative economics. Impossible to define universally An allocation that seems fair to one person

will be viewed by another as highly skewed And may lead to inefficiency

1.5 Economic PolicyEX: a new grading system

Students with A’s, B+’s, and B’s at the end of the course will have points taken away from them and redistributed to those with C’s, D’S, and F’S. In the end, everyone receives a C+

Q: Do you agree with this?

=> Income redistribution

A song: “ you can’t always get what you want”

Sung by The Rolling Stones in 1969 Written by Mick Jagger