Let’s turn now to this question of “What
is Microeconomics?”
What is this topic we’re going to be studying
over the course?
But, before we answer that, we need to answer
a broader question.
What is Economics?
What is this broad field?
There, I think the best definition I’ve
found is that economics is the study of human
action.
And this very broad definition will capture
a lot of the ideas we have about economics,
like economics is something to do with supply
and demand or cash flow or income or how we
use resources.
Defining economics as the study of human action
will capture all of that.
And, it’s actually a definition that I pull
from Ludwig von Mises, from his own book called
“Human Action”, appropriately enough,
in which he is more or less saying that what
economists have been doing throughout the
years, though we may not have realized it,
is we’re just studying human action.
Now, with this, he means we’re studying
the action axiom.
The action axiom is simply the fact that humans
act.
Put a little bit more precisely, this means
that humans behave purposefully.
That is, that we have purposes – we come
up with goals – and we try to achieve those
goals.
We do things to try to achieve them.
Put another way, we could expand this out
some more, and say that humans apply means
to attain ends according to ideas.
Now, all this really requires is that I have
some kind of goal in mind, and that I’m
doing something to try to achieve that goal,
because I think that the goal and what I’m
doing are connected.
That is, the means and the ends are connected,
according to the idea that I have.
It might be something where I’ll be successful.
It might be something where I won’t.
For example, I might very well have the goal
of sating my thirst, and have the means of
a jug of water sitting near me and my labor
that can pick up that jug and pour the water
in my mouth.
That’s my means.
If I have the idea that that is connected
to my ends of sating my thirst, then I will
probably be successful if I do apply those
means to attain that end.
At the same time, I could apply means to attain
ends according to ideas that are wrong or,
in some sense, crazy.
For example, I might have the goal of ending
up in Florida, instead of here in Ohio where
I normally am, I have the means of flapping
my arms, I have some idea in my mind that
these two are connected – if I flap my arms
fast enough, I’m going to end up in Florida.
Now, of course, we know that’s not what
is actually going to happen.
In this case, my action will fail.
Yet it is, at the same time, still an action,
and therefore still something that we can
study in economics.
After all, failure is something that occasionally
happens in the economy – we call that “error”.
Now that we know what economics is, let’s
divide micro and macroeconomics.
I’m sure my Greek scholars will tell me
that micro means “small”.
So, microeconomics, then, would naturally
study the small level – or we’d focus
in on smaller units, while macroeconomics
is “large”, so we look at the larger scale.
Let’s focus on macro first.
Macro – looking at the large scale.
Here we have phenomena like economic growth.
Over the past 400 years, there has been phenomenal
economic growth throughout what we call the
developed and through the developing world
as well, where we are far wealthier.
We have all kinds of conveniences that were
not even thought of 400 years ago, where even
the kings ruling over various empires 400
years ago did not have some of the conveniences
that a normal person in the United States
would have – for example, I can turn on
my air conditioning if it’s too hot outside.
I can turn on my furnace if it’s too cold.
I can pick up my cell phone and call my wife
who might possibly be across the country traveling.
I can do that, and communicate with her instantly.
These are things that are not even thought
of as a possibility 400 years ago.
Yet now, because of the development of technology
and science we can actually do these things.
As a result, we ended up with significant
economic growth.
A second topic that would be macro would be
inflation.
Inflation is generally defined as a general
rise in the price level.
That is, things on the whole are getting more
expensive, or the cost of living is going
up.
This is a huge, broad phenomenon that is very
important, but it is also a macroeconomic
topic.
Business cycles, or the booms and busts that
the economy goes through, where it seems like
businesses are all doing well, and then, all
of the sudden, they’re all doing poorly
– all roughly at the same time.
This is a business cycle, and it’s a large-scale
phenomenon – something you’d study in
macroeconomics.
Unemployment – kind of – fits under the
macroeconomic spectrum.
In a sense a lot of unemployment is related
to business cycles.
During the boom, during the bust.
During the boom, lots of people can get jobs
relatively easily, during the bust, it’s
very difficult to find jobs and lots of people
get laid off.
In as far as that’s our explanation, unemployment
would be considered a macroeconomic topic.
At the same time, there is some level of unemployment
that might come just from what’s happening
inside the labor market itself, that may not
necessarily be the result of what’s happening
in the overall economy.
In as far as we talk about unemployment because
of those reasons, it would actually be a microeconomic
topic.
So, we will be talking about unemployment
and labor markets in this course.
Microeconomics, then, focuses on the small
scale.
What is the smallest scale we can really think
of in economic science?
Really, we have to start at the individual.
It is, after all, the individual human being
that is acting.
Therefore, the individual will be the unit
of analysis in microeconomics.
We start at the individual, we call it “methodological
individualism”.
Start at the individual, and then build up
groups from there, remembering that groups
are always composed of individual people.
Now, still, we would consider us to be at
the micro level when we look at, say, household
decisions.
It may not be one individual person, so it’s
a handful of people working together toward
common goals.
Here, we can still at that as micro – it’s
a small part of the overall economy.
Individual firms are very similar.
An individual business is normally very small
compared to the economy as a whole.
Therefore, it’s something we might study
under microeconomics.
Or an individual market, say the market for
t-shirts or dress pants.
These are individual markets that are a relatively
small part of the economy.
We can study those in microeconomics.
More broadly speaking, there are a number
of microeconomic topics that we might discuss.
For example, prices.
Where do prices come from?
Why is the price of whatever whatever it is?
That’s something that microeconomics explains,
and I think it’s fair to say that that’s
really the heart of microeconomics.
We also look at the role of profits and also
losses.
Profits and losses are a phenomenon that you
experience at the individual firm level.
Therefore, it’s something that, in microeconomics,
we can talk about.
Also, private property rights are something
we talk about in microeconomics.
Though we may not necessarily place a lot
of emphasis on this, it does underlie everything.
For example, a price.
Prices only really make sense if I, as the
buyer, own the money that I have to pay for
the thing.
If I don’t own that money – if I don’t
have private property in that money – then
it doesn’t actually mean anything for me
to say that I’m willing to exchange it.
It’s not mine.
Similarly, the thing that I’m buying.
The person that’s selling it to me better
own it before we start the exchange.
So, private property does underlie everything
we’re doing.
In a sense, I think it’s fair to say that
the market system is really built upon prices,
profits, and property rights.
In addition to these topics, we can also talk
about the market structure or “competitive
environment”.
That is, am I, as a business, the only show
in town?
My market is structured that way, where I
am, in a sense, a monopoly.
Or am I having to face fierce competition
from other firms that are doing very similar
things to what I’m doing?
That is, am I in a competitive environment?
That’s something that we can study because
we’re talking about individual firms in
an individual market.
Insurance is also a pretty big topic in microeconomics
nowadays.
Really, just looking at – at the individual
level, how does that affect insurance markets
both from firms and also from the individual
people looking for insurance?
Now to answer one last question: Why should
you bother studying Microeconomics?
Well, now, on the one hand it is true that
if you’re enrolled in a course, studying
microeconomics will get you some credit that
will help you graduate from college or something
like that.
At the same time, I think that there are a
number of benefits that we get from studying
microeconomics.
One is that we should make better personal
decisions.
For example, you might throw a Frisbee better
if you have some sense about physics.
The same is true of economics.
You can make better personal decisions – that
is, you, as a human being, can choose more
appropriate actions if you have an understanding
about how human action actually works.
So that’s the underlying idea here.
Also, some of the later lectures really revolve
around this question of “How can we make
better personal decisions?”
We do speak to this issue very directly.
Secondy, there is the issue of business strategy.
Most people in our world are going to work
in business in some way, and you want that
business to succeed whether you are a manager
or whether you are simply an employee.
As long as that business is profitable, they
very well may stay in business, and you get
job security.
If the business is not profitable, there is
no way the business can stay in business.
You’ll eventually have to lose your job.
So, we want businesses to do well.
How can they decide to do well?
Well, that is something that we can talk about
in microeconomics.
How should businesses respond, say, once they
know which market structure they’re in?
Now, I may not be able to teach you how to
run multimillion dollar company.
If I knew, I would probably be running a multi-million
dollar company.
I can at least give you some rough guidelines
to help you make major mistakes that some
businesses might make if they were not informed
about things we’re going to talk about in
this course.
Finally, there is the issue of policy making.
Those of us that live in democratic countries
or a representative democracy, like, say,
the United States, are in our own way policymakers.
Every time we go and we vote for a politician,
we are voting into office the policies that
they are proposing.
So it would be very nice for us to know if
these policies are actually going to create
a society in which we will actually want to
live.
So, understanding economic policy and how
microeconomics relates to the analysis of
economic policy is something that is very
important for anyone who might vote for a
representative or makes, perhaps, a direct
analysis of these policies perhaps because
they are the policymakers themselves.
So, being able to understand policymaking
a very important thing.
So my hope is that at the end of the course,
that you’ll be able to make better decisions
in your personal life.
Also, in your career.
And, finally, as a citizen of the country
in which you live.
