Introduction
Session 1:
Introduction to Microeconomics: Course Outline
and Introduction
Academic year 2024-2025
Prof. Álvaro Zapatel
Introduction
Hi everyone!
Introduction
What to expect from this course and class etiquette:
• Be on time. We will always start class at the time scheduled.
• We will always meet in person. No online sessions.
• This is a class on Microeconomic Theory at an introductory level. I will be discussing
and explaining concepts and their applications through class, but I look forward to
your participation, questions and insights.
• Please, ASK QUESTIONS, engage in class. The more you do, the better for you
and everyone around you. University education is meant to be a place where we
can speak our minds and engage in meaningful conversations about everything.
Introduction
What to expect from this course and class etiquette:
• Class material, assignments, grades, etc will all be posted at the Virtual Campus
(campus.eada.edu). If you haven’t gone into it, please navigate through it and get to
understand how it works. It has a user-friendly interface.
• Slides for each session will be uploaded on Fridays (or the day after) after class.
• Please go through the required readings before class, and if time allows, take a look
into further readings. The material will be very helfpul for you to understand what we
will be working on class day.
• Every week I will share news articles relevant to our topic for that week. I expect you
to read them and share your opinions about them.
Introduction
What to expect from this course and class etiquette:
• Once I start class and someone is late, I may deny their entrance until break. The
same will be done if the student is late after break: the student won’t be able to go
back inside.
• Students with an excessive tardiness or absenteeism will be called for a meeting
with the Department. Accordingly, three unjustified absences will lead to a definitive
failure.
Introduction
What to expect from this course and class etiquette:
• Evaluations:
• Two mid-terms (Mid-term 1 on Week 5 (tentatively Oct. 17-18) Mid-term 2 on
Week 10, tentatively on Nov. 21-22).
• Final exam: December 12-13.
• Three problem sets: PS1 due on Week 4 (available on Sep. 26-27, due on Oct.
4-5), PS2 due on Week 9 (available on Oct 31st, due on Nov. 7-8), PS3 due on
Week 12, available on Nov. 28-29, due on Dec. 5-6).
• Classroom assessment: Participation grade (Regular participation on class +
One 10-minute group discussions (+5 minutes of Q&A) of a relevant article to be
approved by the instructor).
• Every week I will be posting one or two articles of Business and Economics
news, and I will run a “cold call” Q&A with you. I will ask you to link the article to
Microeconomics. This interaction will also go to your individual participation
grade.
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There are no dumb questions!
Please ask them, as much as you can.
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Respect, assertiveness and intellectual honesty: fundamental
for success.
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Any questions?
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OK, let’s get started!
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What is Economics and what does it study?
Introduction
What is Economics and what does it study?
• Many of you believe is something strictly related to…
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What is Economics and what does it study?
• Economics is a social science that studies production, allocation and consumption
of godos and services.
• VERY IMPORTANT: Economics main problem is SCARCITY.
Introduction
What is Economics and what does it study?
Introduction
What Economics and what does it study?
• Economics is a social science that studies production, allocation and consumption
of godos and services. (Krugman et al 2013)
• VERY IMPORTANT: Economics main problem is SCARCITY.
• In general, resources (natural, human, physical) are limited and have alternative
uses.
• Yet, appetite is unlimited.
• Hence, we need to make a choice.
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Introduction
So, what is Economics?
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So, what is Economics?
• Economics is a social science that studies
how economic agents (consumers,
businesses and the government) make
decisions and how those decisions
determine how scarce resources are used
in society.
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The economic activity is also linked to employment, technology,
international trade, taxation, subsidies, consumption and
production of goods and services, as well as the economic
agents’ decisions.
Introduction
According to Greg Mankiw, there are 10 principles in
Economics that we should always keep in mind as we dive into
the field and explore its nuances and implications:
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1. People face tradeoffs
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To get one thing, we usually give up something
else.
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2. The cost of something is what you give up to
get it
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Opportunity costs!
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3. Rational people think at the margin
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Rational people? Margin?
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Economists assume (for the sake of modeling!)
that economic agents are rational, meaning that
they make rational decisions, meaning that they
make their optimal decisions at the margin,
given existing restrictions.
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● In any scarcity problem, there is a distinction between:
- effective restrictions (affects the agent’s decision-making)
- ineffective restrictions (doesn’t affect the agent’s decisión-making)
Example: A student who is applying to ABC University’s Global BBA and has an
average grade of 7.5, whereas the university’s requirement is a mínimum
grade of 8. In this case, the student is unable to join this university and has to
explore other options. THIS IS AN EFFECTIVE RESTRICTION.
Introduction
● In any scarcity problem, there is a distinction between:
- effective restrictions (affects the agent’s decision-making)
- ineffective restrictions (doesn’t affect the agent’s decisión-making)
A student who is applying to ABC University’s Global BBA and has an average grade
of 7.5, whereas the university’s requirement is a minimum grade of 8. In this case,
the student is unable to join this university and has to explore other options. THIS
IS AN EFFECTIVE RESTRICTION.
Now, suppose that the University’s requirement drops to a mínimum grade of 7 for
admittance. This is an INEFFECTIVE RESTRICTION for the prospective student,
since now is eligible to attend that school
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Later on you will discover that economists (no
wonder!) incorporated non-rational behavior in
their modeling, given that this assumption could
limit the pursuit to understand human behavior
and decision-making processes.
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4. People respond to incentives
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Incentive is something causing a person to act.
Since people use cost-benefit analyses, they
also respond to incentives.
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When making a decision, economic agents compare alternative in terms of cost
and benefits of making that decision.
● Economic agents make rational decisions, choosing the best alternative given
their set of possibilities and restrictions available.
● Economic agents compare benefits of taking a given decision with the costs
incurred by taking that same decision.
● The decision is made only when its benefits are superior tan its costs.
Introduction
● Benefits can be explicit, for example: money earnings
● Many times benefits cannot be measured explicitly (for example: leisure time).
Hence, benefits can be measured in terms of willingness to pay.
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● Costs can be:
● Explicit: Monetary expense.
● Opportunity costs: the best alternative’s value given up to make the decision.
● Sunk costs: Expenses that have already been made and are non-recoverable.
(These are not taken into consideration when making a cost-benefit análisis).
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If:
Benefits>Economics costs (explicit+opportunity costs) = Take that decision
Benefits<Economics costs (explicit+opportunity costs) = Avoid that decision
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5. Trade can make everyone better off
Introduction
● Trade allows countries to specialize, according to their comparative advantage
and to enjoy a greater variety of goods and services.
● Many times benefits cannot be measured explicitly (for example: leisure time).
Hence, benefits can be measured in terms of willingness to pay.
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6. Markets Are Usually a Good Way to
Organize Economic Activity
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Invisible hand? What is that?
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Scarcity implies that we need to answer four basic questions:
• What to produce and in which amounts?
• How will factors of production will be used?
• Who will consume that production?
• Who makes the decisions on that production and consumption?
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Scarcity implies that we need to answer four basic questions:
• What to produce and in which amounts?
• How will factors of production will be used?
• Who will consume that production?
• Who makes the decisions on that production and consumption?
The answer will depend on how the economic activity is
organized:
Centralized vs decentralized decisions
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7. Governments can sometimes improve
economic outcomes
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Market failures occur when the market fails to allocate
resources efficiently. Governments can step in and
intervene in order to promote efficiency and equity.
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What is a market failure?
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- Externalities
- Assymetric information
- Moral Hazard
- Monopolies
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8. The standard of living depends on a
country’s production
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The more goods and services produced in a
country, the higher the standard of living. As people
consume a larger quantity of goods and services,
their standard of living will increase
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9. Prices rise when the government prints too
much money
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When too much money is floating in the economy, there will be
higher demand for goods and services. This will cause firms to
increase their price in the long run causing inflation.
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10. Society faces a short-run tradeoff between
inflation and unemployment
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In the short run, when prices increase, suppliers will want to
increase their production of goods and services. In order to
achieve this, they need to hire more workers to produce those
goods and services. More hiring means lower unemployment
while there is still inflation. However, this is not the case in the
long-run.
