ECON1010

Introductory Microeconomics

LECTURE 1
Topic 1:
Thinking like an Economist

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Plan of Lecture 1

Firstly (Setting the scene)

1. Administration
2. Expectations

Secondly
3. Economics and Choices
– exploring some core concepts

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ECON1010 staff
Dr Annari de Waal
= Lecturer (Weeks 1 to 13), Course Coordinator
and Tutorial Coordinator (details course profile)

Pass Coordinator (details course profile)

Course Administrators (details course profile)

Staff contact email: econ1010@uq.edu.au

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Course Profile:
Downloaded from Blackboard.
Answers many student questions about ECON1010.
Be aware of the contents.
Note particularly the assessment sections.
Take the time to read it thoroughly.

Blackboard and your student email address

- Communication via Blackboard and your student
email address.
- Please check these regularly during the semester.
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TEXTBOOK
• No specific recommended textbook.
• Suggested reading: Robert H. Frank, Sarah Jennings
and Ben S. Bernanke. Principles of Microeconomics
(Australian 3rd Edition, 2012), McGraw Hill.
• Course Profile lists a few recommended textbooks.
• Other useful microeconomic textbooks can be found
in the Central Library.

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Assessment (please refer to Course Profile)

CML Quizzes (50%) (due dates, see ECP)

CLEAR-JEs (50%) (due dates, see ECP)

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Expectations of students in ECON1010
 Download lecture / tutorial materials from Blackboard.
 Check Blackboard regularly (announcements etc.)
 Attend tutorials & attempt questions (essential
extension with practical applications of lecture
material).
 For exam preparation, watch lecture videos, read
lecture slides, attempt tutorial and other practice
questions.
 For extra help, attend PASS sessions and go to
consultations.
 Revise material weekly, meaning up to 10 hours a
week of self-directed study. 7

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Do I need to come to Lectures?
 All lecture content is assessable.

 Lecture content cumulative (must aim to keep up).

 Lecture recordings and PowerPoint lecture slides are

essential learning materials for this course.

 Lecturer styles are NOT the same from course to course.

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Common ECON1010 Misconceptions.

Economic theory is not relevant to the real world.

Economics theory courses are all about maths.

First-year economic theory courses are easy.

Economic theories learnt in first year are not so

important. You don’t learn anything interesting until
second or third year.

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Question.

A cargo ship is used with economic efficiency if:

a. The average cost per km travelled is minimised.

b. Opportunity cost is minimised.

c. It is always fully loaded between the ports.

d. Profit is maximised for each trip between ports.

e. All of the above.

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Thinking like an Economist (Part 1).

Today, begin by defining some core concepts.

1. Define Economics.
2. Microeconomics and Macroeconomics
3. Scarcity Principle
4. Opportunity Cost
5. Cost Benefit Principle
6. Economic Surplus
7. Rational Decision Making Criteria (and pitfalls)

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1. What is Economics?

“Life is about making choices.

Economics is the science of choice.

That means economics is the science of life.”

by Mr. Alan Duhs

(Senior Lecturer, UQ School of Economics)

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2. What is Microeconomics?
 How to use what you have (your resources) to get as
much as possible of what you want.

 It’s mostly about how individuals make the most

efficient (effective) choices.

 The systematic effects these choices have on other

individuals.

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What Microeconomics is not.
Microeconomics is NOT just about:
 the stock market
 financial transactions (the $$$)
 accounting
 how wealthy a country might be now or in the future

Remember: Microeconomics is about choices.

eg: How does Qantas decide to do maintenance work in
Australia or overseas?
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Other Views of Microeconomics.
The study of:
 how individuals make choices when resources are
scarce.

 how scarce resources can be efficiently allocated.

 how and why individuals trade/interact in markets.

 the implication for the changes in prices and

quantities in individual markets.

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What is Macroeconomics?
(macro = large, and not covered in this course)
 the study of the performance of national economies as
a whole.

 studies policies (choices) governments use to try and

improve national performance.

 the focus is on things such as GDP, interest rates,

inflation, unemployment, and exchange rates.

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Defining the core concepts.
3. Scarcity Principle

 Our resources are limited, so getting more of one

thing means getting less of another.

 Core principle of economics:

= wants exceeds available resources
= choices between alternatives needed
= Scarcity Principle

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Defining the core concepts.
Scarcity Principle

 Something is scarce if you:

- have to sacrifice something else to get it

(e.g. money, time, effort)

- need to pay a price for it (i.e. not free)

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Defining the core concepts.
Scarcity Principle
Getting more of one thing means getting less of another.

a. Consumers will be forced to decide what to consume.

b. Producers will be forced to decide what to produce.
c. Governments will be forced to decided how to allocate
resources to achieve specified objectives.

Economics is based on using what we have to get as

much has possible of what we want tradeoffs.

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Defining the core concepts.
Scarcity Principle
Wants exceed available resources

Scarce resources

Rational choices have to be made

Marginal analysis to make decisions

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Defining the core concepts.
4. Opportunity Cost
- it’s all about what was NOT chosen.
- economic concept to help make a rational choice!

 the alternative NOT chosen when making a decision.

 the value of the next best alternative not chosen.

 what was sacrificed.

 what is given up once a decision has been made.

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Example 1.
Opportunity Cost
You are at a bakery and trying to decide whether to buy a
slice of cake or 3 donuts.

a. What is the opportunity cost of choosing the slice of

cake?
Answer:

b. What is the opportunity cost of choosing the 3

donuts?
Answer:
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Defining the core concepts.
5. Cost Benefit Principle
- choose to do something only if the extra benefit
(incremental benefit) from doing it is greater than (or
equal to) the extra cost (incremental cost), assuming
the individual is rational.

Rational individual
 has well defined goals
 fulfills these goals as best as possible
 rational choices based on costs and benefits
given resources are limited/scarce
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Defining the core concepts.
5. Cost Benefit Principle

Rational choices

DO IT if : extra benefit ≥ extra cost

Remember:
Economics is about the efficient allocation of
resources. This cost benefit principle aims to help
identify what choices should be made.

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Defining the core concepts.

6. Economic Surplus
= (incremental benefits of an action)
– (incremental explicit and implicit costs of that action)

Explicit cost = a cost that involves spending money

(ie: a transaction physically occurs)

Implicit cost = a non-monetary “opportunity cost”

(no transaction occurs but an alternative is not chosen)

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Defining the core concepts.
Economic Surplus
- economic decisions strive to maximise economic
surplus by:
1. maximising the benefits

2. minimising the costs

Economic surplus can be maximised by making choices
that minimise the opportunity cost.
Opportunity cost in economics is about assessing if
an efficient choice of resources has been made.
An outcome is efficient if opportunity cost is minimised.
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Example 2.
Economic Surplus
Suppose a new TV in the city costs $1850. If you
travel to the city to collect it, you can save $150 (and
hence only pay $1700). However, if you travel to the
city, it will mean giving up two hours of paid work of
$140. Should you travel to the city to buy the TV?

Answer:
The choice = keep working and pay $1850 for the TV,
or compare the incremental benefit of gaining $150
saving if give up two hours of work valued at $140
(this is the choice that has to be made).
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Example 2.
Economic Surplus
Answer: if decide to go and pickup TV, then
incremental benefit of an action – incremental costs
= savings made – opportunity cost of going to the city
= (1850 – 1700) – (140)
= 150 – 140
= +10 (the + sign is what is most important)
Conclusion: The benefit (saving) from picking up
is $150. The cost of $140 to give up two hours of
work is less than the benefit of picking up the TV.
So, yes, go and pickup the TV.
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Cost – Benefit Principle:
7. Rules for Making Rational Economic Choices

In economics, a rational choice should:

i) include opportunity cost

ii) exclude sunk cost

iii) measure costs in absolute dollar amount, not

percentages

iv) be based on Marginal Analysis

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Example 3. Opportunity Cost
You have a business choice to make. You can either:

1. Continue to collect rent of $2000 per week from a

commercial property you own, or

2. You can stop renting the property, move in to occupy

the property, then start work on your own new venture.

You expect new venture revenues to be $3500 per week,

with other operating expenses being $1200 per week.

What would be the most rational choice?

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Example 3. Opportunity Cost
Answer: Use the Cost Benefit Principle
Note: sacrificing existing rent of $2000 per week, so as to
move into the building, will be an opportunity cost.

Economic Surplus
= (incremental benefits of an action) –
(incremental explicit and implicit costs of the action)
Economic Surplus
= 3500 – (1200 + 2000)
= 3500 – 3200
= + $300 per week ie: better off by $300 per week if
start the new venture and occupy the building.
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Sunk Cost
= expenses that have occurred in the past before a decision
has been taken.
= costs that would have had to occur in order for a choice
to be made.

= costs that are typically not able to be directly recovered.

i) exploration costs (oil well, mining)

ii) market research costs (focus groups, surveys)
iii) feasibility study costs (before a decision is made)

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Example 4.
Use Absolute values (not proportions)
Suppose a new TV in the city costs $5000 (not $1850
previously). If you travel to the city to collect it, you
can save $150 (and hence only pay $4850).
However, if you travel to the city, it will mean giving
up two hours of paid work of $140. Should you
travel to the city to buy the new TV?

Conclusion: The benefit (saving) from picking up

is $150. The cost of $140 to give up two hours of
work is less than the benefit of picking up. So, yes,
go and pickup the TV. This is the same answer as
when the TV cost $1850 (independent of price).

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Example 5.
Choices based on Marginal Analysis
(not averages)
Marginal Benefit = the change in total benefit from
doing one extra unit of an activity

If you can sell 10 donuts for $20, and sell 11 donuts for
$21.50, the marginal benefit of the 11th donut:
change in total benefit

one extra unit sold
$ 21.50 - $20

(11 - 10) donuts
 $1 .50 for the 11th donut sold 34

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Choices are based on Marginal Analysis
(not averages)
Marginal Cost = the change in total cost from
doing one extra unit of an activity
If you can make 10 donuts for a total cost of $18,
and produce 11 donuts for a total cost of $18.50,
the marginal cost of the 11th donut is
change in total cost

one extra unit produced
$ 1 8 .50 - $18

(11 - 10) donuts
 $ 0 . 50 for the 11th donut 35

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Choices are based on Marginal Analysis
(not averages)
Cost Benefit Principle Definition
DO IT when the extra benefit ≥ extra cost
DO IT when the marginal benefit ≥ marginal cost

Do it when the MB ≥ MC

MB of selling the 11th donut = $1.50

MC of making the 11th donut = $0.50

Decision:
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Choices are based on Marginal Analysis
(not averages)
Average Cost
total cost of producing a total number of items

total number of items produced
$18

10 donuts
 $ 1 .80 on average per donut

Average costs do not give a clear indication as to

whether or not to produce the next donut from an
efficient use of resources perspective.
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Example 6. Rational Decision Making
Should NASA expand the space shuttle program
from three to four launces per year?

Launches Total cost Average cost (AC)

(per year) ($ billion) ($ billion/launch)
1 3 3
2 7 3.5
3 12 4
4 20 5
5 32 6.4

Assume: Average Benefit = $6 billion/launch

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Example 6. Rational Decision Making
Decision to expand is incorrect by using:
- average cost rises to $5 billion to per launch
- average benefit constant at $6 billion per launch

It is incorrect to expand launches from 3 to 4 per year

based on average benefit greater than average cost!

Decision should be based on the extra benefits from

one extra launch compared to the extra costs from
one extra launch using marginal analysis.
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Example 6. Rational Decision Making

Now correctly use Marginal Analysis

Launches Total cost Average cost (AC) Marginal cost (MC)
(per year) ($ billion) ($ billion/launch) ($ billion/launch)
1 3 3 3
2 7 3.5 4
3 12 4 5
4 20 5 8
5 32 6.4 12

Assume: Marginal Benefit (MB) = $6 billion/launch

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Example 6. Rational Decision Making

Launches Marginal benefit (MB) Marginal cost (MC)

(per year) ($ billion/launch) ($ billion/launch)

1 6 3
2 6 4
3 6 5 MB > MC
4 6 8 MB < MC
5 6 12

What is the optimal number of launches per year? 3

(ie: where MB ≥ MC)
Assume: Marginal Benefit (MB) = $6 billion/launch

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Conclusion
Microeconomics
1. relates to how individuals make choices.

2. involves methodologies and decision rules to

help individuals make rational choices.

3. uses benefits & costs to make choices, with a

focus on marginal analysis (more to come in
later lectures).

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Next week:

Lecture 2.

Thinking like an Economist (Part 2)

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