UCLA Principles of Microeconomic Case Study
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ECON1900 Principles of Microeconomics
Week 1:
Economics and Foundations
ECON 1900 Principles of Microeconomics
Outline
1 What Is Economics
2 Microeconomics v.s. Macroeconomics
3 Fundamental Economic Questions
4 Case Study
ECON 1900 Principles of Microeconomics
Outline
1 What Is Economics
2 Microeconomics v.s. Macroeconomics
3 Fundamental Economic Questions
4 Case Study
ECON 1900 Principles of Microeconomics
Discussion 1: What is Economics?
Do you think the story described in the video is an economic
issue? Why or why not?
ECON 1900 Principles of Microeconomics
Discussion 1: What is Economics?
Economics is the study of the choices people make to
attain their goals, given their scarce resources
Scarcity: A situation in which unlimited wants exceed
the limited resources available to fulfill those wants.
ECON 1900 Principles of Microeconomics
How Do Economist Think of this Issue?
ECON 1900 Principles of Microeconomics
How Do Economist Think of this Issue?
My dear, you have asked the wrong question.
Let me explain total value v.s. marginal value
ECON 1900 Principles of Microeconomics
How Do Economist Think of this Issue?
Assumption:
(1) People are rational
(2) People respond to economic incentives
Optimal Decisions Are Made at the Margin
Economists use the word marginal
to mean extra or additional
ECON 1900 Principles of Microeconomics
Optimal Decisions Are Made at the Margin
Economists think about decisions like this in terms of the marginal
cost and benefit (MC and MB): the additional cost or benefit
associated with a small amount extra of some action.
Comparing MC and MB is known as marginal analysis.
ECON 1900 Principles of Microeconomics
How Do Economist Think of this Issue?
ECON 1900 Principles of Microeconomics
How Do Economist Think of this Issue?
ECON 1900 Principles of Microeconomics
Outline
1 What Is Economics
2 Microeconomics v.s. Macroeconomics
3 Fundamental Economic Questions
4 Case Study
ECON 1900 Principles of Microeconomics
Microeconomics and Macroeconomics
Distinguish between microeconomics and macroeconomics.
Microeconomics is the study of
how households and firms make choices,
how they interact in markets, and
how the government attempts to influence their choices.
Macroeconomics is the study of the economy as a whole,
including topics such as inflation, unemployment, and economic
growth.
ECON 1900 Principles of Microeconomics
Table Issues in Microeconomics and Macroeconomics
Examples of Microeconomic Issues
Examples of Macroeconomic Issues
How consumers react to changes in
product prices
Why economies experience periods
of recession and increasing
unemployment
How firms decide what prices to
charge for the products they sell
Which government policy would
most efficiently reduce obesity
The costs and benefits of approving
the sale of a new prescription drug
The most efficient way to reduce air
pollution
Why, over the long run, some
economies have grown much faster
than others
What determines the inflation rate
What determines the value of the
U.S. dollar in exchange for other
currencies
Whether government intervention
can reduce the severity of recessions
ECON 1900 Principles of Microeconomics
Outline
1 What Is Economics
2 Microeconomics v.s. Macroeconomics
3 Fundamental Economic Questions
4 Case Study
ECON 1900 Principles of Microeconomics
Fundamental Economic Questions
ECON 1900 Principles of Microeconomics
The Economic Problem That Every Society Must Solve
(1) What goods and services will be produced?
(2) How will the goods and services be produced?
(3) Who will receive the goods and services produced?
ECON 1900 Principles of Microeconomics
Efficiency of Market Economies
Market economies promote:
Productive efficiency, a situation in which a good or service is
produced at the lowest possible cost; and
Allocative efficiency, a state of the economy in which
production is in accordance with consumer preferences; in
particular, every good or service is produced up to the point
where the last unit provides a marginal benefit to society equal
to the marginal cost of producing it.
ECON 1900 Principles of Microeconomics
Source of Economic Efficiency
Productive efficiency comes about because of competition.
Allocative efficiency arises due to voluntary exchange.
Each transaction that takes place improves the well-being of the buyer and
seller; transactions continue until no further improvement can take place.
ECON 1900 Principles of Microeconomics
Discussion 2: Is full efficiency desirable?
NOT NECESSARILY
Less efficient outcomes may be more fair or equitable.
Equity: The fair distribution of economic benefits.
An important trade-off for a government is that between
efficiency and equity.
ECON 1900 Principles of Microeconomics
Types of Economies
Centrally planned economy: An economy in which the
government decides how economic resources will be allocated.
Market economy: An economy in which the decisions of
households and firms interacting in markets allocate economic
resources.
Efficiency
ECON 1900 Principles of Microeconomics
Equity
Types of Economies
Mixed economy: An economy in which most economic decisions
result from the interaction of buyers and sellers in markets but in
which the government plays a significant role in the allocation of
resources.
Efficiency
ECON 1900 Principles of Microeconomics
Equity
Outline
1 What Is Economics
2 Microeconomics v.s. Macroeconomics
3 Fundamental Economic Questions
4 Case Study
ECON 1900 Principles of Microeconomics
Case Study: Do You Agree Or Disagree With This Economic Policy?
ECON 1900 Principles of Microeconomics
Case Study: What will you choose if you were the policy maker?
The more I work, the less I get??
ECON 1900 Principles of Microeconomics
Case Study: What will you choose if you were the policy maker?
ECON 1900 Principles of Microeconomics
Positive and Normative Analysis
Economists try to mimic natural scientists by using the scientific
method. But economics is a social science; studying the behavior
of people is often tricky.
When analyzing human behavior, we can perform:
Positive analysis: analysis concerned with what is.
Normative analysis: analysis concerned with what ought to be.
Economists mostly perform positive analysis.
Government policymakers have increasingly relied on economic
analysis.
ECON 1900 Principles of Microeconomics
Thank you!
ECON 1900 Principles of Microeconomics
Case B:
Please use the economics knowledge you have learned so far to analyze the case below. You can propose your own
questions and then answer them. Remember, there is no absolutely correct answer to this exercise. Its purpose is to
provide you with an opportunity to demonstrate your ability to think like an economist by applying economic principles to
interpret the logic of a real-world phenomenon.
Below is what a single parent (with two children) face in Philadelphia in 1996. Do you agree or disagree with this
economic policy? Why or why not?
The low-wage trap for a family of three in Philadelphia, 1996
Source: Edgar Browning. Stealing From Each Other, pp.92-95
Earned Income Medicaid Food Stamps Housing Subsidy AFDC (welfare) EITC Taxes Disposable Income
$0
Yes Yes
Yes
Yes
$19.217
$5,000 Yes
+
+
+ Yes
$20,730
$10.000 0
.
.
0 1 + $18.253
$15.000
0
+
1 t $18.436
$25,000
0
1 t $16.929
$30,000
0 t
$19,837
(Hint: Week 1 Slide 23-27 including the video.
Now we come to the end of the semester, what other theories we have learned in this course can also be applied to
explain this?)
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