Chapter 1

1.1 What is Microeconomics?

Microeconomics is a science that investigates the social consequences of the interaction of rational
being that pursue their perceived self-interest. Rational person refers to people that act accordingly
with a reason or logic. However, some meaningful experiences comes from exploring and being
away from our comfort zones.

1.1.1 Economics as a Science

Economics uses scientific method which formulates model that generates hypothesis, then the
hypothesis will be tested with data. Most economist formulates models that are rooted in
economic theory and then examine whether the hypothesis that emerge are rejected by real-
world observations. Some economist actually performs experiments, but most economists
prefer using data from the real world to see if their predictions are true.

1.1.2 Rationality, Self-Interest, and Indiana Jones

Rationality refers to the action or performance of a person towards achieving their goals. Goals
are subjective, it can be a big thing for the others while it doesn’t make sense to some. The goals
we made are based on our self-interest. As long as it satisfies us, it doesn’t need to be satisfying
in a deeper sense to others. In the movie Indiana Jones, there is an example of dilemma that
explains self-interest. Harisson Ford as the Protagonist is with his mortally wounded father Sean
Connery, they are in a cave which have number of potions in a different container in other side
of the cave. Now the problem is one potion can save his father and one can may kill him. It will
violate the perceptions of economists about rational self-interest if the protagonist sacrifice
himself to try out all the potions before his father. Audience perceived the self-interest of
Harrison to save his father and also make himself safe. The rational course of action given in this
case is for Harisson think that it is better to save one life or saving both lives than losing both
lives. This examples explains the self-interest is not necessarily a selfish act and being rational is
choosing the best course of action to achieve one’s goal.

1.1.3 Social Consequences, Pencils, and Global Warming

Social Consequences refers to an individual behavior that are captured in “equilibrium” where
all people do their best under any circumstances given. Milton Friedman makes an example
about initially preposterous claim that pencil that not everybody know how to make from
scratch. Economists are fascinated by the fact that pencils are produced despite the fact that
most of the people doesn’t know how to produce them and despite the fact that no one is in
charged to combine these people and materials that will produce the pencils. This example
explains how cooperation in a massive scale comes from the people who doesn’t they’re
contributing, but pure from being rational, self-interest behavior, and doing their best they can
give under given circumstances. Global Warming as compared how people cooperate to make
pencils, they can’t also be tamed by the same forces. The goal of microeconomic is to
 understand when we should rely on our individual self-in and knowing when such self-interest
hinder cooperation.

1.2 Economics, Incentives, and Economic Models

Economics is defined as the exploration of a simple premise that people respond to incentives
because they generally attempt to do the best they can given their circumstances. Models are used
to understand what are the underlying issues we are concerned about and it helps us to think
conceptually.

1.2.1 Economic Models, Simplicity, and Picasso

Consumers is characterized as cold individuals who rationally calculate the costs and benefits of
different alternatives using a mechanical characterization of “taste” as a guide. Economics
doesn’t define who we are as a human being. It provides framework for systematically studying
human decision making that relate to our desire in achieving one’s goals and how such decision
making affects the society. Simplicity in models is explained as a virtue so long as the model can
predict well what they’re trying to predict. An example this concept is Picasso’s works, an
individual need to exert effort to view the first painting to have a better understanding to the
rest of his works. The simplicity of economic models become a useful tool in building
understanding of how does the decision of an individual can impact the world.

1.2.2 Economic Models, Realism, and Billiard Players

Most Billiard players aren’t expert physicists who can calculate the precise path of billiard balls
using equations that govern the behavior of billiard balls. Suppose that they wanted to predict
what would be the next move of each of the billiard players and was suggested to model each
player as an expert physicist, the model would be absurd in a sense that there are players who
are just a high school graduate. Nevertheless, a model that assumes the presence of such
expertise within the players may be useful model to predict how each players will play the
game. Good models are the models that can predict well, it doesn’t have to be realistic in some
literal sense as long as it helps as have a better understanding.

1.2.3 An “Unintended” Consequence of Learning through Economic Models

Unintended consequences refers to the consequences that we didn’t think of when we do
something. The topic we learned in an economic class doesn’t always there when we step in real
professional world, but all the topics that stays in our mind and can be applied in the real world
is what helps us to survive on our own. One of the skills we can learn in economics that can be
applied in real world is conceptual thinking, it is an important skills we need to gain to develop
such mastery.

1.3 Predicting versus Judging Behavior and Social Outcomes