Microeconomics 14/9/22

Lecture Notes on Microeconomics

14/9/22

Thinking Like an Economist

Economists play 2 roles:

Scientists: Try to explain the world

Policy Advisors: Try to improve it

Economists employ the scientific method

Scientific method: observation, theory, more observation

In economics, conducting experiments is often impractical

Natural experiments are offered by history

Assumptions and Models

Assumptions simplify the complex world

Economists use models (highly simplified representation) to study economic issues

Circular flow diagram: Shows how money flows through markets among household and firms

Includes 2 actors:

Household: Own factors of production, buy and consume

Firms: buy/hire factors of production, sell goods and services

Factors of production are the resources that the economy uses to produce goods and services.

They include: labor, land, capital (buildings and machines used in production)

The faster the economic wheel turns, the better (faster turnover)

Production Possibilities Frontier (PPF)

A graph that shows combinations of 2 goods the economy can produce given the technology and resources available

Points on the PPF: Possible, efficient

Points below the PPF: Possible, inefficient

Points above the PPF: Not possible

Moving along the PPF involves shifting resources, the slope of the PPF tells you the opportunity cost one good in terms of the other

Economist as Policy Advisor

economists make positive statements: describe the world as it is

economists make normative statements: describe how the world should be