Microeconomics

Second Edition, Global Edition

EC 101.03

Chapter 1

The Principles
and Practice of
Economics
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Learning Objective

1.1 The Scope of Economics

1.2 Three Principles of Economics

1.3 The First Principle of Economics: Optimization

1.4 The Second Principle of Economics: Equilibrium

1.5 The Third Principle of Economics: Empiricism

1.6 Is Economics Good for You?

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Key Ideas (1 of 2)

1. Economics is the study of people’s choices.

2. The first principle of economics is that people try to

optimize; they try to choose the best available
option.

3. The second principle of economics is that economic

systems tend to be in equilibrium, a situation in
which nobody would benefit by changing his or her
own behavior.
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Key Ideas (2 of 2)

4. The third principle of economics is empiricism—

analysis that uses data. Economists use data to
test theories and to determine what is causing
things to happen in the real world.

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The Principles and Practice of Economics
(1 of 4)

Evidenced-Based Economics Example: Is Facebook free?

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The Principles and Practice of Economics (2
of 4)

What area of your life is NOT

covered by economics?

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The Principles and Practice of Economics
(3 of 4)

Economists study
human behavior
Choice—not money—is the unifying feature of all
the things that economists study

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The Principles and Practice of Economics
(4 of 4)

Economic Agent = Any

group or individual that
makes choices, such as
consumers, firms,
parents, politicians, etc.

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The Scope of Economics (1 of 6)
What does it mean if
something is “scarce”?

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The Scope of Economics (2 of 6)

Scarce resources are things that people want,

where the quantity that people want often exceeds

the quantity that is available.

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The Scope of Economics (3 of 6)

Economics studies how agents make choices

among scarce resources and how those choices

affect society.

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The Scope of Economics (4 of 6)
How many pieces should each person have taken?

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The Scope of Economics (5 of 6)

Positive Economics
Some people took more than one and not
everyone got a piece

Normative economics
Each student should just take one so that
everyone gets a piece

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The Scope of Economics (6 of 6)
Microeconomics
The study of how
individuals, firms, and
governments make choices

Macroeconomics
The study of the whole
economy

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Three Principles of Economics

1. Optimization = making the best choice possible

with given information

2. Equilibrium = when everyone is optimizing; no

one would be better off with a different choice

3. Empiricism = using data to figure out answers to

interesting questions
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The First Principle of Economics: Optimization
Trade-offs and Budget Constraints (1 of 5)

Optimization = making the best choice possible

with given information
People don’t always succeed in optimizing—we are
not calculating machines—but people generally try to
optimize.

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The First Principle of Economics: Optimization
Trade-offs and Budget Constraints (2 of 5)
What is the optimal level of crime?

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The First Principle of Economics: Optimization
Trade-offs and Budget Constraints (3 of 5)

You want to buy a You want to buy a

$20 book. If you drive $1,000 computer. If
3 miles, you can buy you drive 3 miles,
it for $10. you can buy it for
$990.
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The First Principle of Economics: Optimization
Trade-offs and Budget Constraints (4 of 5)

What does it cost What does it cost

you to not drive to you to not drive to
buy the book? $10! buy the computer?

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The First Principle of Economics: Optimization
Trade-offs and Budget Constraints (5 of 5)

Costs Benefits

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The Principles and Practice of Economics
Evidenced-Based Economics Example: Is Facebook free?

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The Second Principle of Economics:
Equilibrium (1 of 7)

A situation in which no one benefits by

changing his/her behavior

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The Second Principle of Economics:
Equilibrium (2 of 7)

What Does Equilibrium Really Mean?

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The Second Principle of Economics:
Equilibrium (3 of 7)

The Free Rider Problem

Exists when an individual or group is

able to enjoy the benefits of a situation
without incurring the costs

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The Second Principle of Economics:
Equilibrium (4 of 7)

Which one is
experiencing
equilibrium?
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The Second Principle of Economics:
Equilibrium (5 of 7)

Is there an incentive

for him to change his

behavior?

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The Second Principle of Economics:
Equilibrium (6 of 7)
Is this an equilibrium?
NO! The group is NOT in equilibrium

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The Second Principle of Economics:
Equilibrium (7 of 7)
How do we deal with this Free Rider?

1. Group needs to decide what is fair

2. Some sort of pressure needs to be put on the
free rider to get him to conform
Markets have no mechanism for deciding what is
fair

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The Third Principle of Economics:
Empiricism

Crowded beaches and

hot temperatures go
together.

So if we want to make it
cooler, keep people from
going to the beach!

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Is Economics Good for You? (1 of 3)

What are the costs and benefits of this course?

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Is Economics Good for You? (2 of 3)

Costs Benefits
• Tuition • Graduation

• Other courses • Knowledge

• Higher earnings
• Sleep?
potential?
• Stress? • Learning to think like
an Economist!

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Is Economics Good for You? (3 of 3)

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