Principles of Microeconomics

Week 1

Aug 22, 2024

Announcement & Plan for Today

! Announcements
! The Chapter 1 Smartwork assignment is due next Thursday
(Aug 29).
! Chapter 1 will be evaluated based on completion. Starting
from Chapter 2 through the final chapter, Smartwork
assignments will be evaluated based on correctness.
! Check your group assignment (“Class Seating Chart” in the
Week 1 Module).
! Plan for Today
! Review and finish the Foundations of Microeconomics.

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Review: Foundations of Microeconomics
direct cost explicit cost
Cost
opportunity cost implicit cost limited resources
! 1. Trade-offs: People face trade-offs due to scarcity.
! 2. Opportunity cost: The best decision is the one that
minimizes the direct cost + opportunity cost.
! Opportunity cost: the value of the next-best alternative that
must be given up to obtain some item.
! 3. Marginal thinking: Rational people think at the margin.
! Thinking at the margin means following the rule of
optimization:
If MB > MC, do more. If MB < MC, do less.
! The optimal amount is achieved when MB = MC.

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Foundations of Microeconomics

! 4. Incentives: People respond to incentives.

! 5. Trade creates value: Trade can make people better off.
! Circular Flow Diagram

3/12
Foundation 4. Incentives

! People respond to incentives

! Incentives: something that induces a person to act or not act
! Category 1
getting paid for a job
! Positive incentives: encourage actions (rewards)
! Negative incentives: discourage actions (punishment)
! Category 2 a fine if speed
you
! Direct incentives: intended change in behavior bonus
kid ! Indirect incentives: a secondary (unintended) change in
if
40 paid behavior
sales
salesperson can push too hard
kid requires payment for with some
do
houseclients
a particular
housework doing anythingaround the

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Exercise 1: Positive vs. Negative Incentives
Group I
! A reward offered for the return of a lost item:
Positive/Negative

F
! Your instructor offers extra credit for attending an event
outside of class: Positive/Negative
! The government taxes the sale of cigarettes:
Positive/Negative
! A parking ticket given for parking in a no-parking zone:
Positive/Negative
! The government offers a tax credit for donating to recognized
Deward
charities: Positive/Negative
! Your instructor institutes an attendance policy that drops your
grade if you miss more than two classes: Positive/Negative

5/12
Exercise 2: Direct vs. Indirect Incentives

unintended
! Some drivers whose cars have semi-autonomous driving
technology spend more time with their eyes off the road,

943 texting or otherwise distracted: Direct/Indirect

! The U.S. federal government has, at times, offered a tax credit
for buyers of high-fuel-efficiency cars and alternative-fuel cars.
The tax credit serves as a(n) [direct/indirect] incentive to buy
an environment-friendly vehicle.

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Foundation 5. Trade Creates Value
banana

Toffee bananol
coffee
! Each person focuses on what he or she does best
(=specialization)
! People exchange goods and services voluntarily (=trade).
=⇒ Trade can make people better off.

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Circular Flow Diagram simple version
! For simplicity, let’s assume that there are two decision-makers and
two markets in the economy. Product
7
Product Market Resource Market
buyer seller goods
Household services
(consumer) (employee)
decision seller buyer
Firm
(producer) (employer)
output
makers
! Now, let’s draw a diagram that visualizes the economy: Resource
ma factors
mmmm outer revenue spending of production
flow of funds PC PC
sold bought input
Min inner examples
labor
inputs or Tabor labor capital
outputs land
wage income
labor market 8/12
Complicated Circular Flow (No Exam)
(You don’t need to know about this diagram!)

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Exercise 3: An Example of Trade

Groupt
Tophat
! Suppose you own a bicycle but haven’t found the time to ride
it much lately. These days, it is only worth $31 to you.
One of your close friends, who recently got a job at the
college bookstore two miles down the road, wants to take it
off your hands. He offers you $70 for the bicycle, and you
gladly accept. Your friend is also happy because he thinks the
bicycle is worth $98.
67
Question: How much total value was created from this trade?

fi
Price
Your value 31
31 98
friend's 98
4310 61280 10/12
Exercise 4: Circular Flow

Group 7
Product
In the markets for goods and services in the circular-flow diagram,
a. households provide firms with savings for investment.A financial
b. households provide firms with labor, land, and capital. resource
c. firms provide households with output.Ives
product
d. firms provide households with profit.

Fine resource

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Exercise 5: Circular Flow

Group 9

Which of the following transactions does not take place in the

markets for factors of production in the circular flow diagram?
a. A construction company rentsresource
trucks for its business. resource
b. A farmer hires a worker to help with the harvest. capital
i
c. Anthony receives a salary for his work as an analyst for an
investment firm.
labor
d. A woman buys corn for dinner.
I product

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Marginal Thinking
Preview Ch 16 Consumer Choice

Quantity Total Utility Marginal Utility

0 0
I 7300 300
2 500 7200
3 600
100

Ch 8 Business cost Production

0

labor Total Product Marginal

produ
70290
t 70
2 160 90
2100 100
3 260
4 330
20
5 350
7
Marginal Product
of 4th worker
g y

Any Questions? Thank you and see you next time!