MICROECONOMICS

An Introduction
Contents

▪ Definition
▪ Microeconomics and Macroeconomics
▪ Two Big Questions
▪ Economists – Way of Thinking
▪ Economics – A Social Science and Policy Tool
▪ Jobs Available for Economists
Definition

• Economics is a social science that covers a broad subject matter in seeking to understand the social
world.
• Economics studies the behavior of social systems—such as markets, corporations, legislatures, and
families—as the outcome of interactions through institutions between goal-directed individuals.
• Doing economic research involves asking questions about the social world and addressing those
questions with data and models, employing mathematical and statistical tools whenever possible to aid
the analysis.

https://www.harvard.edu/programs/economics/#:~:text=Economics%20is%20a%20social%20science,institutions%20between%20goal%2Ddirected%20i
ndividuals.
Definition

All economic questions arise because we want more than we can get.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.

The choices we make depend on the incentives we face.

An incentive is a reward that encourages an action or a
penalty that discourages an action.
Definition

▪ Economics
▪ is the social science
▪ that studies the choices
▪ that individuals, businesses, governments, and entire societies make
▪ as they cope with scarcity and the incentives
▪ that influence and reconcile those choices.

▪ Economics has two main parts:

▪ Microeconomics
▪ Macroeconomics
MICRO (small) vs. MACRO (big) - ECONOMICS

MICROECONOMICS MACROECONOMICS
is the study of choices that individuals is the study of the performance of the
and businesses make, the way those choices national and global economies.
interact in markets, and the influence of
governments.
An example of a microeconomic question is: An example of a macroeconomic question is:
Why are people buying more e-books and fewer Why does the unemployment rate in Canada
hard copy books? fluctuate?
Microeconomics is a research theory that Macroeconomics is a research theory that
emphasizes the financial decisions that focuses on large-scale financial events, including
households, businesses, and individuals make. It how different countries' financial policies
helps establish how different individuals budget influence the global economy. It evaluates how
their resources and select job positions. governments organize spending processes,
develop tax protocols, and provide services to
their residents.
Two Big Economic Questions

▪ Two big questions summarize the scope of economics:

▪ How do choices end up determining what, how, and for whom goods and services
get produced?

▪ When do choices made in the pursuit of self-interest also promote the social
interest?
Economic Questions

What? How?
In Canada, agriculture accounts for 2 percent of Goods and services are produced by using
total production, manufactured goods for 28 productive resources that economists call factors
percent, and services (retail and wholesale trade, of production.
healthcare, and education are the biggest ones)
for 70 percent. Factors of production are grouped into four
categories:
In Ethiopia, agriculture accounts for 35 percent of
total production, manufactured goods for 21 Land
percent, and services for 44 percent. Labour
Capital
Entrepreneurship
▪ Figure 1.1 shows these numbers for
Canada and Ethiopia …and also for China.
▪ What determines these
patterns of production?
▪ How do choices end up determining
the quantity of each item produced
in Canada and around the world?
Factors of Production

Land Labor Capital Entrepreneurship

• The “gifts of nature” that we • The work time and work • The tools, instruments, • The human resource that
use to produce goods and effort that people devote to machines, buildings, and organizes land, labour, and
services are land. producing goods and other constructions that capital is entrepreneurship.
services is labour. businesses use to produce
• The quality of labour goods and services are
depends on human capital, capital.
which is the knowledge and
skill that people obtain from
education, on-the-job
training, and work
experience.
▪ Figure 1.2 shows a measure of the
growth of human capital in Canada
over the last century—
the percentage of the population
that has completed different levels of education.
▪ Economics explains these trends
For Whom?

Factors of Production Earns

1)LAND RENT
2) LABOUR WAGES
3) CAPITAL INTEREST
4) ENTREPRENEURSHIP PROFIT
Big Economic Questions

▪ Do Choices made in the Pursuit of Self-Interest also Promote the

Social Interest?

▪ Every day, 35.4 million Canadians and 7.2 billion people in other countries make economic
choices that result in What, How, and For Whom goods and services are produced.

▪ Do we produce the right things in the right quantities?

▪ Do we use our factors of production in the best way?

▪ Do the goods and services go to those who benefit most from them?
Big Economic Questions

Self-Interest Social Interest

You make choices that are in your Choices that are best for society as a
self-interest—choices that you think whole are said to be
are best for you. in the social interest.

Social interest has two dimensions:

1. Efficiency

2. Equity
Big Economic Questions

Efficiency and Social Interest Fair Shares and Social Interest

Resource use is efficient if it is not The idea that the social interest
possible to make someone better off requires “fair shares” is a deeply held
without making someone else worse one.
off.
But what is fair?
Equity is fairness, but economists
have a variety of views about what is
fair.
Big Economic Questions

Four topics that generate discussion and that illustrate tension between
self-interest and social interest are

1. Globalization
2. Information-age monopolies
3. Global warming
4. Economic instability
Globalization

Globalization means the expansion of international trade, borrowing and lending, and
investment.
Globalization is in the self-interest of consumers who buy low-cost imported goods and
services and …
… in the self-interest of the multinational firms that produce in low-cost regions and sell in
high-price regions.
But is globalization in the self-interest of low-wage workers in other countries and Canadian
firms that can’t compete with low-cost imports?
Is globalization in the social interest?
Information-Age Monopolies

The technological change of the past forty years has been called the Information
Revolution.
The information revolution has clearly served your self-interest: It has provided your
smartphone, laptop, loads of handy applications, and the Internet.
It has also served the self-interest of Bill Gates of Microsoft and Gordon Moore of Intel,
both of whom have seen their wealth soar.
But did the information revolution serve the social interest?
CLIMATE CHANGE

Climate change is a political issue today.

Every political leader is acutely aware of the problem and of the popularity of
having proposals that might lower carbon emissions.

Burning fossil fuels to generate electricity and to power airplanes, automobiles,

and trucks pours a staggering 28 billion tonnes—4 tonnes per person—of carbon
dioxide into the atmosphere each year.
Big Economic Questions

Two-thirds of the world’s carbon emissions comes from the United States, China,
the European Union, Russia, and India.

The fastest growing emissions are coming from India and China.

The amount of global warming caused by economic activity and its effects are
uncertain, but the emissions continue to grow and pose huge risks.
What Can We Do?

Every day, when you make self-interested choices to use electricity and gasoline, you
contribute to carbon emissions.
You leave your carbon footprint.
You can lessen your carbon footprint by walking, riding a bike, taking a cold shower, or
planting a tree.
But can each one of us be relied upon to make decisions that affect the Earth’s carbon-
dioxide concentration in the social interest?
Can governments change the incentives we face so that our self-interested choices are also
in the social interest?
Economic Instability

▪ In 2008, U.S. banks were in trouble. They had made loans that borrowers
couldn’t repay and they were holding securities the values of which had crashed.

▪ Banks’ choices to take deposits and make loans are made in self-interest, but
does this lending and borrowing serve the social interest?

▪ Do banks lend too much in the pursuit of profit?

Way of Thinking – The Economist

▪ Six key ideas define the economic way of thinking:

▪ A choice is a tradeoff.
▪ People make rational choices by comparing benefits and costs.
▪ Benefit is what you gain from something.
▪ Cost is what you must give up to get something.
▪ Most choices are “how-much” choices made at the margin.
▪ Choices respond to incentives.
A Choice is a Tradeoff

▪ The economic way of thinking places scarcity and its implication, choice, at
center stage.
▪ You can think about every choice as a tradeoff—an exchange—giving up one
thing to get something else.
▪ On Saturday night, will you study or have fun?
▪ You can’t study or have fun at the same time, so you must make a choice.
▪ Whatever you choose, you could have chosen something else.
▪ Your choice is a tradeoff.
Making a Rational Choice

▪ A rational choice is one that compares costs and benefits and achieves the greatest benefit
over cost for the person making the choice.

▪ Only the wants of the person making a choice are relevant to determine its rationality.

▪ The idea of rational choice provides an answer to the first question: What goods and services
will be produced and in what quantities?

▪ The answer is: Those that people rationally choose to buy!

Benefit

▪ How do people choose rationally?

▪ The answers turn on benefits and costs.

▪ Benefit: What you Gain – What’s In It For Me?

▪ The benefit of something is the gain or pleasure that it brings and is determined by
preferences

▪ Preferences are what a person likes and dislikes and the intensity of those feelings.
COST

▪ Cost: What you Must Give Up

▪ The opportunity cost of something is the highest-valued alternative that must be given up to
get it.

▪ What is your opportunity cost of going to an AC/DC concert?

▪ Opportunity cost has two components:

1. The things you can’t afford to buy if you purchase the AC/DC ticket.
2. The things you can’t do with your time if you go to the concert.
MARGIN

▪ How Much? Choosing at the Margin

▪ You can allocate the next hour between studying and instant messaging your friends.

▪ The choice is not all or nothing, but you must decide how many minutes to allocate to
each activity.

▪ To make this decision, you compare the benefit of a little bit more study time with its
cost—you make your choice at the margin.
▪ To make a choice at the margin, you evaluate the consequences of making incremental
changes in the use of your time.

▪ The benefit from pursuing an incremental increase in an activity is its marginal benefit.

▪ The opportunity cost of pursuing an incremental increase in an activity is its marginal

cost.

▪ If the marginal benefit from an incremental increase in an activity exceeds its marginal
cost, your rational choice is to do more of that activity.
INCENTIVES

▪ Choices Respond to Incentives

▪ A change in marginal cost or a change in marginal benefit changes the incentives

that we face and leads us to change our choice.

▪ The central idea of economics is that we can predict how choices will change by
looking at changes in incentives.

▪ Incentives are also the key to reconciling self-interest and the social interest.
Economist as Social Scientist

▪ Economists distinguish between two types of statement:

▪ Positive statements—what is
▪ Normative statements—what ought to be

▪ A positive statement can be tested by checking it against facts.

▪ A normative statement expresses an opinion and cannot be tested.

Economics: A Social Science and Policy Tool

▪ Unscrambling Cause and Effect

▪ The task of economic science is to discover positive statements that are consistent with
what we observe in the world and that enable us to understand how the economic world
works.

▪ Economists create and test economic models.

▪ An economic model is a description of some aspect of the economic world that includes
only those features that are needed for the purpose at hand.
▪ A model is tested by comparing its predictions with the facts.

▪ But testing an economic model is difficult, so economists also use

▪ Natural experiments

▪ Statistical investigations

▪ Economic experiments
Economist as Policy Adviser

▪ Economics is a toolkit for advising governments and businesses and for making personal
decisions.

▪ All the policy questions on which economists provide advice involve a blend of the positive
and the normative.

▪ Economics can’t help with the normative part—the goal.

▪ But for a given goal, economics provides a method of evaluating alternative solutions—
comparing marginal benefits and marginal costs.
Economists in the Economy

▪ What are the jobs available to an economics major?

▪ Is the number of economics jobs expected to grow orshrink?

▪ How much do economics graduates earn?

▪ What are the skills needed for an economics job?

Jobs for an Economics Major

▪ A major in economics opens the door to the pursuit of a masters or PhD and a
career as an economist.
▪ The work of economists varies enormously but it includes:
▪ collecting and analyzing data on the production and use of resources, goods, and
services;
▪ predicting future trends; and
▪ studying ways of using resources more efficiently.

▪ Economists work in private firms, government, and international organizations.

Earnings of Economics Majors

▪ Earnings of economics majors vary a lot depending on the job and the level of
qualifications.
▪ Economists with a PhD would expect to earn about $100,000 a year by mid-
career.
▪ Economists working as analysts earn more than the national average.
Will Jobs for Economists Grow?

▪ The U.S. Bureau of Labor Statistics forecasts that jobs for:

▪ 1. Economists with a PhD will grow by 6 percent.
▪ 2. Budget analysts will grow by 2 percent.
▪ 3. Financial analysts will grow by 12 percent.
▪ 4. Market research analysts will grow by 19 percent.

▪ The numbers for Canadian jobs for economists will likely be similar.
Skills Needed for Economics Jobs

▪ Employers look for five skills:

▪ 1. Critical-thinking skills
▪ 2. Analytical skills
▪ 3. Math skills
▪ 4. Writing skills
▪ 5. Oral communication skills
Economists in the Economy

▪ 1. Critical-thinking skills—the ability to clarify and solve problems using logic.

▪ 2. Analytical skills —the ability to use economic tools to examine data, see patterns, and reach logical
conclusions

▪ 3. Math skills—the ability to use of math and statistics to analyze data and reach valid conclusions

▪ 4. Writing skills—the ability to present ideas and reason succinct written reports

▪ 5. Oral communication skills —the ability to explain ideas and reasons to non-economists
References:

▪ Parkin, Michael; Bade, Robin: Microeconomics: Canada in the Global Environment (11th Edition),

▪ https://www.harvard.edu/programs/economics/#:~:text=Economics%20is%20a%20social%20science,institutions%20betwee
n%20goal%2Ddirected%20individuals.

▪ https://ca.indeed.com/career-advice/career-development/micro-vs-
macroeconomics?aceid=&gclid=Cj0KCQjw5f2lBhCkARIsAHeTvliMzh9jwpkOPRTF-1Fhs7TNJlSo57oo1lgvyoGkNZWDJt4-
T_IQsAoaAheFEALw_wcB&gclsrc=aw.ds