Microeconomics 8/27/14
Economics is a social science that studies how people allocate their limited resources to satisfy their unlimited wants
Microeconomics consist of consumers, firms, individual markets
Examples: a sales tax on the cigarette industry, agricultural price support programs on the cotton industry
Macroeconomics consist of economy as a whole (economic growth, inflation, unemployment), how economies interact
Examples: an increasing inflation rate on national living standards, an increasing inflation rate on national living standards, Obamacare
Economic models- Model: a simplified representation of reality
Graphs and equations
The Circular-Flow Diagram
• Households
– Consume goods and services
– Own factors of production (e.g. labor)
• Firms:
– Produce goods and services
Learn the Role of consumers and firms
• Importance of markets
• Economic agents are interrelated
Does not include government, international markets, unemployment, raw materials, non-profits, banks or bank regulators, no illegal activities
Course Outline
• Markets
– Gains from Trade
– Supply and Demand
– Efficiency of Markets
– Price Controls, Taxes
• Consumers and Producers
– Making Decisions
• What if markets fail?
– Monopolies, Externalities, Public Goods

Microeconomics Notes 8/29/14
• Today:
–Opportunity cost
– Production possibility frontier
–Gains from trade
• Scarcity
– trade-offs
• Making choices: compare benefits and costs
Opportunity cost: what you must give up in order to get something
– The value of the next best alternative
Example: Shaq still hires movers instead of doing it himself
Production possibility frontier
• 2 goods:
– Corn and rockets
• Can produce:
50 rockets and 0 tons of corn, or 0 rockets and 100 tons of corn, or any linear combination
Efficiency
• Economy is efficient if
– there is no missed opportunities
–