Chapter 1 - What is microeconomics? After reading this chapter, you should be able to answer the following questions: What is economics? What are key assumptions of economics? What is Production Possibility Frontier? What is opportunity cost? What is the difference between microeconomics and macroeconomics? | Chapter 1 What is Microeconomics? McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is economics? What are key assumptions of economics? What is Production Possibility Frontier? What is opportunity cost? What is the difference between microeconomics and macroeconomics? 1- What is Economics? Economics is the study of human behavior using math and statistics. 1- Key Assumptions People are self-interested. People are rational. People have unlimited desires but limited resources. 1- Self-Interest Most human behavior is motivated by self-interest. Self-interest is much more than greed. It encompasses anything that makes the person happy, . children's welfare, charity. 1- Self-Interest Self-interested people most often take actions that are in the best interests of society. Only sometimes, self-interested people take actions that harm society as a whole, . creating pollution. 1- . | Chapter 1 What is Microeconomics? McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is economics? What are key assumptions of economics? What is Production Possibility Frontier? What is opportunity cost? What is the difference between microeconomics and macroeconomics? 1- What is Economics? Economics is the study of human behavior using math and statistics. 1- Key Assumptions People are self-interested. People are rational. People have unlimited desires but limited resources. 1- Self-Interest Most human behavior is motivated by self-interest. Self-interest is much more than greed. It encompasses anything that makes the person happy, . children's welfare, charity. 1- Self-Interest Self-interested people most often take actions that are in the best interests of society. Only sometimes, self-interested people take actions that harm society as a whole, . creating pollution. 1- Rational People Are you rational? Rational people consider all consequences of their actions. Rational people take actions that promote their self-interest. Rational people respond to incentives. 1- Indirect Effects Incentives to rational people can create indirect effects of government policies. For example: Policy: Pharmaceutical companies have to sell lifesaving drugs at lower prices to reduce the cost of medical care. Indirect effect: Pharmaceutical companies spend less money on research and development of new drugs. 1- Indirect Effects By studying rational decisions, economics helps to forecast indirect effects of proposed policies. 1- Unlimited Desires vs. Limited Resources All people have unlimited desires but face limited resources, which means ‘scarcity’. We cannot satisfy all our wants. Economics studies how people use their limited resources to satisfy unlimited wants. 1- Tradeoffs We have to choose which wants to satisfy. Scarcity forces .
