Course Introduction: Principles of Microeconomics

00:01 Hello and welcome to your online presentation of microeconomics, my name is James deNicco and this is your introduction, So to let's start at the beginning, what is economics? Well economics is the study of choice in the world of scarcity.

00:14 So what does that mean? We all have unlimited wants and needs, we want as much as we can get out there, right If we can have the whole world, we'd take the whole world, however, there's limited resources That creates this problem of scarcity.

00:29 With this problem of scarcity, these are a couple questions that we need to answer One is, what do we produce then? how do we produce it and for whom do we produce it? Well, there's a few different ways you can go about this, few different ways you can set up your economy.

00:44 You can have a completely free enterprise system.

00:47 I really can't think of too many examples of that, that will be like the wild west, that's through anarchy - no rules, right? You can have centrally planned economy, so we have a small group of people trying to plan for every eventuality in the economy.

01:00 The closest thing you can maybe think of is the former Soviet Union.

01:03 That usually doesn't work out so it's hard for a small group of people to plan foreverything for the economy.

01:09 Most of the countries around the world are a mixed-bag.

01:12 Okay, so there's two branches of economics, there's macroeconomics and there's microeconomics.

01:18 Here, we're gonna be talking about microeconomics.

01:21 So first, let's talk about macroeconomics.

01:23 Macroeconomics is the study of performance of national economies and the policies the governments use to try to improve that performance.

01:32 It talk about things like GDP or unemployment rates, or inflation - those are all part of macroeconomics.

01:40 Really good macroeconomics is built on micoreconomics.

01:43 So what is microeconomics? It's the study of individual choices for people under scarcity and the implications for prices and quantities in individual markets.

01:53 Okay, that's what microeconomics is.

01:55 An example okay, so individual choice for the household or the person.

01:59 For me, I love ice cream so I have to decide how much ice cream I want to eat, what's the point where one more ice cream cone cost me more than it benefits me.

02:10 Where I go, "Ugh I don't feel any good that that feeling outweighs the fact that I go, oh this this ice cream is delicious" Right, I have to decide how many ice cream cones I want in a week.

02:20 On the firm side, say it's the ice cream shop, they're looking and saying, Oh it's the deNicco guy, he's coming back for more ice cream, we have to make some decisions.

02:28 We have to decide how many people we need to hire, how many ice cream machines we need in order to meet this guy's demand.

02:35 So as these individual choices, the households and the firms, that's what microeconomics is, it's the study of that.

02:41 That's what we will be focusing on here.

02:44 Alright, so now we're gonna talk about some general principles we should understand going through this presentation.

02:50 The first that people faced trade-offs, that make sense right? You make decisions, you know sometimes you're gonna have to give something up in order to get something else I go to the movie, what am I giving up? I'm giving up the money to go the movie.

03:03 I also may be giving up some time I could be at work earning wages.

03:07 So one of the major trade-off sthat we face in an economy is efficiency versus equantity.

03:13 So efficiency and equantity, in order to gain some equantity, sometimes we need to give up some efficiency.

03:20 So what does that mean? If you want to reallocate resources from the more productive to the less productive, that will make things equal, however by definition, take your resources from the more productive and giving them to the less productive is gonna cause an inefficiency, we're gonna become less efficient.

03:40 Maybe that's okay, I mean we can decide as a society, as a general populace if that's what we think is fair.

03:46 We want things to be more equal, we don't want a large disparity between the very rich and the very poor however, in order to make things equal, oftentimes taking those resources from the productive and giving them to the less productive, you're gonna give up some efficiency.

04:02 So that's an example trade-offs, one of the big examples that we have to decide upon when we're setting up an economy.

04:10 Opportunity cost, this is a term we need to know, so what are opportunity cost? Whatever must be given up in order to attain something, this still, this goes back to these trade-offs, okay? So a classic example, what are your opportunity cost of going to school? So there's both explicit and implicit cost involved in opportunity cost.

04:32 Explicit - that's when there's an outlay of money; implicit cost - those are all the other cost.

04:37 So what are explicit cost of going to school? Well, we give up tuition, right? We have to pay that money.

04:44 We have to pay that money to go to school, we have to pay the money for our books, we have to pay the money for our housing.

04:49 Those are our explicit cost of going to school.

04:52 What are implicit cost? Well one are lost wages.

04:55 Most of you are probably smart people out there.

04:57 You could be out there earning a wage if you weren't going to school.

05:01 That's an implicit cost but you're giving up that wage in order to go to school, so it's an opportunity cost, what you must give up in order to attain something.

05:10 We also have lost leisure time, right? We all like to be sitting out on the beach and enjoying the sun, maybe sipping on a martini however, if we're gonna be going to school, we have to give up that leisure time.

05:22 That's another implicit cost which is part of our opportunity cost.

05:29 Alright, so one more example here are the people face trade-offs.

05:32 We're gonna use this simple model of the production possibility frontier.

05:37 Okay, so we're gonna set up a country that can only produce two goods and they have fixed resources.

05:43 So in order to make more of one good, they have to give up some of the other good.

05:48 Here in our example, we're gonna have wings and beer, you're gonna see me use all that a lot throughout the presentations because those are two of my favourite things: chicken wings and beer.

05:57 It makes me a happy man.

05:59 Alright, so in this economy, you can either produce all wings and no beer, all beer and no wings or any possibility along this production possibility frontier.

06:11 So this is where we're constrained, this is where our resources keep us right along this curve right here.

06:17 We can't be outside of this curve because we don't have the resources to get there.

06:22 We don't want to be inside this curve because we'd be inefficient So let's take a little closer look at this, alright.

06:28 We're gonna face trade-offs, alright, you can't produce more cars without giving up more computers.

06:34 You can't produce more beer without giving up more wings.

06:38 So what are our opportunity cost here? That's how many wings we have to give up in order to get another beer.

06:44 So let's take a look at this.

06:46 From A to B, alright, we want to increase our production of beer, we're gonna have to decrease our production of wings.

06:53 So what's our opportunity cost of producing 100 more IPAs, that's a type of beer, that's the type that I like, For 100 more beers, we would have to give up 200 wings.

07:03 Alright, we face trade-offs in production as society.

07:07 In this simple model, we just have two goods and we're fixing our resources.

07:11 Okay, so in order to make more beer, you have to give up some wings.

07:16 Alright so now, you're gonna notice that this this production possibility frontier has a bow shape.

07:21 That's because in this example, we have specialization in this economy.

07:25 So the opportunity cost are gonna increase as we moved one extreme for another.

07:30 And you can see that, right? As you move further to the right, the curve gets steeper and steeper and steeper, so for the same size unit increase in beer production, we're gonna have to give up more and more wings.

07:42 That's the idea, say we're at point E here, people that are best suited for the wing production, they're gonna be moving into beer production and they're not gonna be very good at it so we're gonna have big losses for very small gains.

07:56 Again, you can see it in the shape of the curve, it gets steeper and steeper and steeper and steeper.

08:01 So for the same size unit increase in beer, we're gonna have to give up more more and more wings because we have specialization in this economy.

08:10 If there was no specialization here in this economy, it would be a linear curve.

08:14 The slope will be the same throughout, it wouldn't get steeper and steeper.

08:18 Alright, now let's take a look at some technological advances in these two different industries.

08:23 Let's first let's focus here on the left on a technological advance in the wing industry.

08:28 So what does that mean? With the same amount of resources, we can produce more wings so for every unit of beer that we want to produce, we're gonna have to give up more wings.

08:38 The opportunity cost of beer is gonna be larger in terms of wings that you give up, and you can see it because this curve is gonna be steeper at every point of beer production along this horizontal axis right here.

08:51 So you see the line starts higher but they end up at the same point.

08:56 That means that curve is steeper, you're giving up more wings for each unit of beer that you produce.

09:02 Here for our technological advance in the brewing industry is just the exact opposite.

09:06 You could produce more beer with the same resources, so for every unit that you move to the left to increase wing production, you're gonna have to give up more beer.

09:17 There's a higher opportunity cost of wing production in terms of beer that you give up.

09:23 Another principle we need to understand is that rational people think at the margin.

09:27 So what are rational people? They're people who systemically and purposefully do the best they can to achieve their objectives.

09:34 So I think most of us are rational, we're gonna do the best we can to achieve what we want.

09:39 Okay, so rational people think at the margins.

09:41 So what's marginal change? It's a small incremental adjustment to a plan of action.

09:46 So when you make decisions, you compare marginal costs to marginal benefits.

09:51 So it's the idea - if I do this, if I take one step forward, is it gonna benefit me more than it's gonna cost me? If it does, I take that step.

10:00 If it's It's gonna cost more than benefits, I don't take that step.

10:03 So you think about when you're gonna hire somebody.

10:05 You're gonna hire one more worker.

10:07 You won't do that if the wage to pay that worker is higher than the revenues they're gonna bring in.

10:13 So rational people think of the margins.

10:15 They compare the next step.

10:17 They do a cost-benefit analysis at each step going forward to make sure it's the proper decision.

10:24 Also, people respond to incentives.

10:27 Okay, so this is a principle that policymakers often disregard.

10:32 So in economics, we keep that in mind, people are gonna respond to incentives.

10:36 So you have something called the efficiency-wage model in labor that tells you if you pay workers more money, they're gonna work harder for you cause they're scared to lose their job.

10:46 This is something the policymakers oftentimes think about, so say you make up a rule that companies have to pay for health benefits if somebody works more than 29 hours a week for you.

10:58 Well there's good intentions, you want to give people benefits but like I said policymakers sometimes forget that people respond to incentives or firms respond to incentives.

11:08 So what might happen if you set the threshold at 29 hours a week and then people qualify for benefits? Well, firms might cut people's hours, right? So people respond to incentives, that's another principle we should keep in mind as we go through this online presentation.

11:27 Also, the last thing we're gonna talk about here is, trade can make everyone better off.

11:33 Alright, so this can be sometimes controversial cause there's winners and losers, but trade can make everybody better off if we specialize.

11:40 We specialize in producing the goods that we're efficient at, and we get away from producing the goods that we're not efficient at.

11:47 So there's winners and losers because whenever you get away from making a certain type of good, the people that make that good are gonna lose out, they might have to find another job.

11:56 But in general, most economist agree that trade is gonna make us all better off in the end if we specialize at what we're efficient at making and then we can all buy more of everything.

12:06 I make what I'm good at, you make what you're good at then we can trade and we can have more of everything.

12:12 So that's your introduction, I hit on on some different topics that we'll be going through in this online presentation.

12:17 I hope you enjoy it, thank you.