ECC1000 Lecture Notes - Lecture 1: Gross Domestic Product, Opportunity Cost, Marginal Utility
23 May 2018
School
Department
Course
Professor
ECC1000: Principles of Microeconomics
Admin
●Consultation: 10-11am Friday E978, Menzies Bldg
●Email: [email protected]
●Unit admin help: [email protected]
Topic I: Introduction to Microeconomics
Week 1 To-do: Read Chap 1, 2 and 3
Thinking like an Economist
Scarcity and Choice
●Scarcity: limited resources relative to (unlimited wants)
●We must make a Choice:
○Positive analysis (what is) eg: % of gross domestic product (GDP) that is
military spending
○Normative analysis (what should be) eg: % of GDP that should be military
spending
●Economics is the study of how society chooses when resources are scarce
Micro versus Macro
●How individuals households and firms make decisions of resource allocation
(micro)
○Amount of machinery to buy, types of goods to produce etc
●How a nation allocates resources (macro)
1. Trade-offs
●Since resources are limited we must make a choice
●Trade-off: by choosing one option, we give up the other options
○Eg: gov’t spend more on health care = less funds for edu, pension, defence etc
○Eg: work vs leisure
○Eg: efficiency vs equity trade-off
2. Opportunity Cost
●Because we face trade-offs when making a choice, we need to consider the costs and
benefits of the choices
○Surplus = benefits - costs
○Make the choice that maximises surplus
○But what do we include as costs in economics?
■Consider not just monetary costs BUT opportunity cost as well.
●Opportunity cost (of an activity) is the value of the best alternative you must give up
for that activity
●On Saturday night, you can:
○Watch a movie on Netflix
○Sleep
○Study
■Could be the value of a party
○Party
■Could be the value of watching a movie
3. Marginal Analysis
●Rational people think at the margin
●“Rational” to economists means choosing the action that is best for yourself ie:
maximises surplus
○Note: Not necessarily selfish: increased happiness or others may increase your
surplus
●Marginal analysis: An individual (or firm/society) should take an action if, and only
if, the extra benefits, marginal benefit, from taking the action are at least as great as
the extra costs, marginal cost
●Example
○Costs $20,000 to hire, fuel and crew a 100 seat return flight to Bali
○Costs extra $50 per passenger
○Each ticket is $400, you sell 80 tickets (TR $32,000 and TC $20,000 + $50*80
= $24,000)
○Last minute a passenger offers $100 to join the flight
○Marginal analysis - should you accept the offer?
○Case 1 - Reject = profit of $8000
○Case 2 - Accept = profit of $8050 (TR $32,100 and TC $24,050)
○So should accept the offer.
○Marginal Analysis
■Marginal benefit of the additional passenger = $100 in additional
revenue
■Marginal costs of additional passenger = $50 in additional costs
■Since the marginal benefit exceeds the marginal cost, the airline is
better off accepting the passenger
■Eg: SG Airlines is letting you bid to upgrade your seat (Following 30
other airlines doing the same) -
http://fortune.com/2016/07/06/singapore-airlines-passengers-bid-seat-u
pgrade/
4. People Respond to Incentives
●Incentive - a reward or punishment that is meant to change people’s behaviour ie
what they choose
○Eg: tax on cigs reduces demand of consumption
○Eg: production subsidy for solar panels = increase of supply
5. Trade can make everyone better off
●We can always be made better off by trading
●Adam Smith - Specialization - If someone makes one thing the most efficiently, they
can make that thing and trade with others for their specialization to increase
efficiency.
Positive and Normative
●A positive statement is one that seeks to describe the world as it is.
●A normative statement is one that offers an opinion as to the way the world should
be.
●These statements do not need to be factual, however positive statements can always
be supported or refuted by data, while normative statements require a larger
philosophical framework to evaluate.
Reasons for Disagreement (Two Main Reasons)
●Differences in values = they disagree about a normative issue
○Eg: the extent of the moral obligation that one human or citizen has to another
●Differences in scientific judgements = differing opinions about factual matters
○Eg: the relative merits of competing theories or the values of economic
parameters.
Economic Models
Thinking like an economist: How do economists proceed?
●Observation of real world phenomena
●Construction of a model (verbal, graphical, mathematical)
○Identification of relevant relationships
○Specification of assumptions
●Logical deductions from the model
●Conclusions and testable predictions
●Comparison with actual economic behaviour
Importance of Assumptions
●Reality is too complex
○Compare the real world to Google Maps - not realistic but useful
●Likewise, the economy is too complex
○Economic models are not realistic, but they are useful
○Eg: 2 x 2 model of int trade: only two countries and only two goods
■Able to show why both nations can gain from trade easily and simply
Example of Economic Model: Production Possibilities Frontier
●The Production Possibilities Frontier (PPF) is a graph showing the various
combinations of output that the economy can possibly product
using all the available
Document Summary
Week (cid:544) to-do: read chap (cid:544), (cid:545) a(cid:300)d (cid:546) Scarcity: limited resources relative to (unlimited wants) We must make a choice: military spending. Positive analysis (what is) eg: % of gross domestic product (gdp) that is. Normative analysis (what should be) eg: % of gdp that should be military spending. Economics is the study of how society chooses when resources are scarce. How individuals households and firms make decisions of resource allocation (micro) Amount of machinery to buy, types of goods to produce etc. How a nation allocates resources (macro: trade-offs. Since resources are limited we must make a choice. Trade-off: by choosing one option, we give up the other options. Eg: gov"t spend more on health care = less funds for edu, pension, defence etc. Eg: efficiency vs equity trade-off: opportunity cost. Because we face trade-offs when making a choice, we need to consider the costs and benefits of the choices.
