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Econ 110 Principles of Microeconomics Welcome! Econ 110 Principles of Microeconomics Welcome!

 • “Economics is common sense made difficult” – As seen by an undergraduate • “Economics is common sense made difficult” – As seen by an undergraduate student

Dr. Anwar Al-Shriaan Economics Department Office hours: Sundays and Tuesdays 12: 00– 12: 50 Dr. Anwar Al-Shriaan Economics Department Office hours: Sundays and Tuesdays 12: 00– 12: 50 pm and by appt.

Today • Syllabus • Intro to economics Today • Syllabus • Intro to economics

What will we be studying? Eco 110 is the first economic theory course • What will we be studying? Eco 110 is the first economic theory course • basic foundation of economics • tools of discipline

Look at • • • buyer and seller behaviour (markets) role of government in Look at • • • buyer and seller behaviour (markets) role of government in markets consumer choice producer behaviour determinants of income and poverty

Why have energy prices risen (fallen)? Why have energy prices risen (fallen)?

Why does price control not work? Why does price control not work?

Is Microsoft a monopoly? Why do we care? Is Microsoft a monopoly? Why do we care?

Is college worth the cost? Is college worth the cost?

What causes the gender wage gap? What causes the gender wage gap?

Why do airlines require a Saturday night stay for a low fare? Why do airlines require a Saturday night stay for a low fare?

Course Materials Required: Mc. Connell and Brue“ Economics“, 16 th ed Course Materials Required: Mc. Connell and Brue“ Economics“, 16 th ed

Recommended course web site • URL at top of the syllabus • contains – Recommended course web site • URL at top of the syllabus • contains – course information – exam study guides – TA’s

lecture notes • Power. Point slides lecture notes • Power. Point slides

Email list • I send email about – Announcements – Course information • Do Email list • I send email about – Announcements – Course information • Do you prefer Emails or Facebook groups.

TA • Check my website • But please see me too! TA • Check my website • But please see me too!

Grading Policy Midterm 1 30% Midterm 2 30% Recitation and Participations 10% Final 30% Grading Policy Midterm 1 30% Midterm 2 30% Recitation and Participations 10% Final 30%

Grading Policy Letter grades will be assigned as follows: 94. 00 – 100. 0 Grading Policy Letter grades will be assigned as follows: 94. 00 – 100. 0 % … A 90. 00 – 93. 99 % … A 86. 00 – 89. 99 % … B+ 83. 00 – 85. 99 % … B 80. 00 – 82. 99 % … B 78. 00 – 79. 99 % … C+ 73. 00 – 77. 99 % … C 70. 00 – 72. 99 % … C 66. 00 – 69. 99 % … D+ 60. 00 – 65. 99 % … D 59. 99 – 0. 00 % … F

Grading Policy Your Final Grades: 1 st Mid + 2 nd Mid + Part Grading Policy Your Final Grades: 1 st Mid + 2 nd Mid + Part + Final. If Your Participation > 8. 5 you will have Extra credits as follows: Your Final Grades: 20% X Max (1 st Mid, 2 nd Mid, Final)

Grading Policy Your Final Grades: 1 st Mid + 2 nd Mid + TA Grading Policy Your Final Grades: 1 st Mid + 2 nd Mid + TA + Part + Final. If Your Participation > 8. 5 you will have Extra credits as follows: Your Final Grades: 20% X Max (1 st Mid, 2 nd Mid, Final) 1 st Mid (25) 2 nd Mid (25) Part (10) Final (40) Total 22 24 9 28 82 84% 88% 70% B- 86 B+

1 st Mid (25) 2 nd Mid (25) Part (10) Final (40) Total 15 1 st Mid (25) 2 nd Mid (25) Part (10) Final (40) Total 15 17 9 36 77 60% 68% 90% C 82. 4 B-

1 st Mid (25) 2 nd Mid (25) Part (10) Final (40) Total 15 1 st Mid (25) 2 nd Mid (25) Part (10) Final (40) Total 15 17 6 40 76 100% 76 68% 15 17 9 40 C 80 B- 86 B+

final exam • cumulative final exam • cumulative

Makeup's • • • Usually I don’t do it planned absence: 1 week’s notice Makeup's • • • Usually I don’t do it planned absence: 1 week’s notice emergencies: case-by-case must be an excused absence! must be documented! makeup's may be essay exams or I may re weight other exams

Attendance • regular attendance is expected • you are responsible for information in class Attendance • regular attendance is expected • you are responsible for information in class • attendance is necessary to earn extra credit.

Please be respectful of your classmates • be on time • do not talk Please be respectful of your classmates • be on time • do not talk during lecture • do not have your phone on

Cheating • you cheat, • I catch you, • you fail the course • Cheating • you cheat, • I catch you, • you fail the course • programmable calculators (e. g. TI 83), translators, phones, PDAs, etc. are NOT allowed in exams

Course Schedule • in syllabus • note exam dates, • note the final exam Course Schedule • in syllabus • note exam dates, • note the final exam date & time

Tips for success • • come to class with lecture notes to follow read Tips for success • • come to class with lecture notes to follow read the book!! weekly “look-through” ask for help ME or the TA or ME use available resources – course web site

Why you should try to learn something in this course. Percentage of wage dispersion Why you should try to learn something in this course. Percentage of wage dispersion explained by skill factors. Huge variation in earnings of low vs. high-skilled college graduates

 • if you need special accommodations, see me • if you are having • if you need special accommodations, see me • if you are having problems in the course, see me sooner NOT later

Some definitions of economics Some definitions of economics

 • “Economics is a study of mankind in the ordinary business of life” • “Economics is a study of mankind in the ordinary business of life” • Alfred Marshall

 • • "the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists. " • Joan Robinson

 • “Economics is what economists do” • Jacob Viner • “Economics is what economists do” • Jacob Viner

Economics (1) • Study of the choices people make to attain their goals given Economics (1) • Study of the choices people make to attain their goals given their scarce resources.

Economics: Foundations and Models 1. What do economists study? • gasoline prices, inflation, housing Economics: Foundations and Models 1. What do economists study? • gasoline prices, inflation, housing markets, international trade, income inequality, sports, families, smoking, health care, happiness • decision-making or choices 2. How do they do it? • by using theories and models • theories are based on assumptions

What makes a good theory or a model? • Models are not judged by What makes a good theory or a model? • Models are not judged by their realism but by their usefulness • What is the most useless map in the world? To be useful a model has to be refutable

Why study theory? • “I don’t know how it is in theory but here Why study theory? • “I don’t know how it is in theory but here is what I know from my 20 years of experience will happen “ • Laura, Executive MBA student • Theory saves time!

Learning Objective 1. 3 Making • When Economists Disagree: the A Debate over Outsourcing Learning Objective 1. 3 Making • When Economists Disagree: the A Debate over Outsourcing Connection Does outsourcing by U. S. firms raise or lower incomes in the United States?

Economics (2) • Study of the choices people make to attain their goals given Economics (2) • Study of the choices people make to attain their goals given their scarce resources.

Economics Scarcity When the price is zero there is not enough for everyone Unlimited Economics Scarcity When the price is zero there is not enough for everyone Unlimited wants Choices People behave as if they are comparing the costs and benefits Benefits Limited availability Costs

Economics Scarcity Everything has alternative uses Tradeoffs Opportunity cost Economics Scarcity Everything has alternative uses Tradeoffs Opportunity cost

Economics Choices People are rational when they behave as if they were comparing costs Economics Choices People are rational when they behave as if they were comparing costs and benefits People respond to incentives Decisions are made on the margin

as if • “…getting out of bed in the morning and making breakfast involves as if • “…getting out of bed in the morning and making breakfast involves more complex decisions than the average game of chess. (Will that fries egg kill me in twenty-eight years? )” • Charles Wheelan

Economics (3) • Study of the choices people make to attain their goals given Economics (3) • Study of the choices people make to attain their goals given their scarce resources.

The Economic Problem That Every Society Must Solve Trade-offs force society to make choices, The Economic Problem That Every Society Must Solve Trade-offs force society to make choices, particularly when answering the following three fundamental questions: 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?

The Economic Problem That Every Society Must Solve • Centrally Planned Economies versus Market The Economic Problem That Every Society Must Solve • Centrally Planned Economies versus Market 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.

The Economic Problem That Every Society Must Solve • The Modern “Mixed” Economy Mixed The Economic Problem That Every Society Must Solve • The Modern “Mixed” Economy 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.

Economic Models • Normative and Positive Analysis Positive analysis Analysis concerned with what is. Economic Models • Normative and Positive Analysis Positive analysis Analysis concerned with what is. Normative analysis Analysis concerned with what ought to be. Don’t Let This Happen to YOU! Don’t Confuse Positive Analysis with Normative Analysis

2 CHAPTER The Market System and the Circular Flow 2 CHAPTER The Market System and the Circular Flow

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES 1. LAND 2. CAPITAL HUMAN RESOURCES 3. LABOR SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES 1. LAND 2. CAPITAL HUMAN RESOURCES 3. LABOR 4. ENTREPRENEURIAL ABILITY

Resource payments: correspond to resource categories PROPERTY RESOURCES RENTAL LAND INCOME INTEREST CAPITAL INCOME Resource payments: correspond to resource categories PROPERTY RESOURCES RENTAL LAND INCOME INTEREST CAPITAL INCOME HUMAN RESOURCES LABOR ENTREPRENEUR WAGES PROFIT & LOSS

Macroeconomics Starts Here Macroeconomics Starts Here

Economic Systems • Definition: A particular set of institutional arrangements and a coordinating mechanism Economic Systems • Definition: A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem. • Economic systems differ as to: 1) who owns the factors of production 2) the method used to motivate, coordinate, and direct economic activity.

The Command System • The government owns most property resources and economic decision making The Command System • The government owns most property resources and economic decision making occur through a central economic plan. • The central planning board determines production goals for each firm and resources to be allocated.

The Market System • There is private ownership of resources. • Markets and prices The Market System • There is private ownership of resources. • Markets and prices coordinate and direct economic activity. • Each participant acts in its own self-interest. • In pure capitalism the government plays a very limited role.

Characteristics of the Market System • • • Private Property. Freedom of firms to Characteristics of the Market System • • • Private Property. Freedom of firms to choose. Self interest. Competition. Markets and prices. Technology and capital goods. Specialization. Use of money. Active, but limited government.

The Circular Flow Model • There are two groups of decision makers in the The Circular Flow Model • There are two groups of decision makers in the private economy: households (resource owners) and businesses (resource users) • The market system (resource markets and product markets) coordinates these decisions.

What happens in the resource markets? a. Households sell resources directly or indirectly (through What happens in the resource markets? a. Households sell resources directly or indirectly (through ownership of corporations) to businesses. b. Businesses buy resources in order to produce goods and services. c. Interaction of these sellers and buyers determines the price of each resource, which in turn provides income for the owner of that resource. d. Flow of payments from businesses for the resources constitutes business costs and resource owners’ incomes.

What happens in the product markets? a. Households are on the buying side of What happens in the product markets? a. Households are on the buying side of these markets, purchasing goods and services. b. Businesses are on the selling side of these markets, offering products for sale. c. Interaction of these buyers and sellers determines the price of each product. d. Flow of consumer expenditures constitutes sales receipts for businesses.

CIRCULAR FLOW MODEL RESOURCE MARKET BUSINESSES HOUSEHOLDS PRODUCT MARKET CIRCULAR FLOW MODEL RESOURCE MARKET BUSINESSES HOUSEHOLDS PRODUCT MARKET

CIRCULAR FLOW MODEL RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS PRODUCT MARKET CIRCULAR FLOW MODEL RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS PRODUCT MARKET

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

More Realistic Circular Flow More Realistic Circular Flow

Macroeconomic Policies Macroeconomic Policies

Limitations of the model: 1. Does not depict transactions between households and between businesses Limitations of the model: 1. Does not depict transactions between households and between businesses (interbusinesses). 2. Ignores government and the “rest of the world” in the decision-making process (we will take care of them later on). 3. Does not explain how prices of products and resources are actually determined.