hello and welcome to our very first
lecture chapter one what is Microeconomics
seems like a reasonable place to start a
class let's figure out what it is that you're
about to study
of course there would be multiple definitions
of microeconomics but in general it's
going to come down to something along
the lines of it is the study
of how households and firms make
decisions
when they interact in markets and
how the choices of households and
firms will be influenced by government
policy sometimes the government is intentionally
trying to influence their
actions sometimes it's unintentional
in a true market economy you would have
just
households and firms we live in a world
where we have households, firms and government 
and they call that a mixed economy
so what are these decisions they're
making
certainly it's about buying and selling it's about
how much to produce what price to sell
it at
how much to buy what price to pay for it
those sorts of decisions
and as these decisions are being made by
the buyers and sellers they are having to
face a unpleasant reality that their
resources are scarce
and so since we don't have
an infinite amount everything we could
possibly want we have to make decisions
of how to use things we use things one way we
can't use it another
and that's what we mean by the
allocation of our scarce resources
how do we decide what to use the iron ore
for
and once we've used it we've used it
right so how do we make those decision
and the study of that is of course
is microeconomics
coming into scarcity a little bit more
because it really is the root of
economic we would not have economics without 
scarcity so what is it
a good definition of it is unlimited
wants
meets limited resources the idea is we all
producers consumers whatever group
we're looking at in
the economic world we all have unlimited
wants but
we have to decide which ones we can
actually satisfy because our resources
are not
unlimited you can prove this quite easily
to your self you can make a list of
things that you would like to buy right
now I have a feeling that list is going
to be a little bit longer and a little
more expensive than your current
resources your budget would allow so
we're all dealing with this idea this
unlimited wants meeting limited
resources
and I do mean we all are you even if you
think if you're the richest person in
the world you still have scarcity because it's
not just about money
it's about all resources which would
include time
and when you have a certain amount of
time when you've chosen to do an
activity
like come to this class can spend an hour
working on this class you are giving up
anything else you could have done at
that time and that's what we're looking
at here in economics we're looking at the
fact that because
scarcity exists scarcity is an always
existing
ever present condition of the world we live
in that
when you make decisions to use your time
certain way
use your money a certain way then you are by
definition facing
a trade-off you're giving up the option
of using that money in that time some
other way
and the technical term for giving that up or for valuing what you gave up in
economics is what we call
opportunity cost so by choosing
something
you have to then be not choosing
something else right
you spend an hour here you don't have it available elsewhere
you spend your money going out to eat
then you don't have the money available
to
pay for I don't know new shoes that month
not the same money at least and so
technically the way we
actually value opportunity cost is
out of all the various options you'd have of
alternative uses of your time alternative uses of your money
there something that's the best second
option the best next best option
whatever that value is that's truly
opportunity costs we're gonna see more
opportunity cost in Chapter two
but it's a fundamental part economics
because it's coming
naturally from scarcity and one last
thing here
it's important to note at this point even though it won't totally make sense yet
that scarcity is not shortage shortage is a
term sure you've heard of before
it means obviously not having enough of
something
it sounds very similar to scarcity but
it's not they actually are
two very different terms and so as we
get through to chapter 3&4 I think we'll
see more clearly exactly what shortage is
but let me just point this out
scarcity always exists scarcity exists
because we live in is imperfect fallen
world
presumably heaven would have no
scarcity
we would have everything you could
possibly want an abundant of 
resources or maybe our wants are low
but whatever it is we wouldn't have
scarcity there and you know what
you wouldn't economic so there's no
economics in heaven
not exactly sure what that means about my
profession however
keeping on with it we are not in heaven
and we are here on this world where we
do have
unlimited wants facing our limited
resources a scarcity exists at all
times you can have market equilibrium
and you still have scarcity because there
were decisions made
of how to allocate your resources to get to
that point equilibrium
a shortage is a market out of equilibrium it is just a temporary condition
that the market will fix
itself if it's allowed to alright what
is market
as long as I am talking about markets it's
really just a group of buyers and
sellers coming together
to trade goods and services 
it also would be the institutions or
whatever arrangements are being
put together so they can come together
and trade with each other
as I said at the very beginning a market
economy is the term you would use for
a system where it's just buyers and
sellers making the decisions which
allocates all our resources
whereas a mixed economy also brings in a
thing called government that
makes decisions affects the rules and
therefore
and can affect the decision that 
households 
and producers are making and we lived in
a mixed economy
so we we will talk mainly about market
economy
but when we get to a chapter where we talk
about taxation
obviously that's bringing in the mixed
economy but when you're looking at a
market transaction it's just involving a
buyer and seller
it really doesn't matter at that point
if it's market or mixed we will be focusing
on that
decisions of the buyer and seller
another fundamental
important point of microeconomics is
concept called voluntary exchange
and basically as long as I was just talking
about government government is usually
about
involuntary exchange government is the
only entity that can command
something to happen so they can command
you to pay taxes even though you may not
voluntarily want to pay it
or to do other sorts of rules and
regulations
but when we're looking at buyers and sellers
interacting in a market we're talking
about
voluntary exchange and that's very
important to understand the concept of
what we're saying here we
you're only doing it because you want to
so
allocations in the market are considered
efficient because
all decisions are based on voluntary
exchange
no buyer or seller would agree to a
transaction that makes them worse off
it's
not rational to do something that you know
was gonna make your worse off you wouldn't
do it
and that means any time we've seen
actual transaction occur that it must
have improved the allocation of
resources
so if you sold your car for four
thousand dollars it means by definition
that you preferred the four thousand
dollars to the car
even if you would like to have more you
still agreed to it so four thousand
dollars means more to you in the car and
the buyer
course values the car more than the four
thousand dollars if that wasn't the case
there would have been a sale
and so that's what we mean by voluntary
exchange
so if a
market is considered each efficient
because of voluntary exchange what do we mean by 
fish in sea
could be two different types of
things one is productive efficiency the
term production producers
production is a good or service been
produced at its lowest costs and
producers have the incentive to do that
because they want to maximize their profits
they're gonna look to minimize the cost
there's another kind of efficiency which
is that the the answer to what
goods and services should be produced is
when it's the optimal ones the one that
people most want to buy
that's considered allocative efficiency
and the reason producers have an
incentive to achieve allocative
efficiency is they do actually want to
sell what they produce so they are actively
seeking
what will best sell when they make
their decision of what to produce
and so what we're saying is a market
economy is naturally bringing itself
to these levels a productive efficiency
and allocative efficiency
alright another concept that's very important to
understand for gonna introduce economics
is marginal analysis
the idea is that when our
producers and sellers
or consumers are making decisions of
how much more to buy
how much more to produce they're looking
at what we call
the margin the last unit consumed the
last unit produced
so from here on when you see the term
marginal just mentally translate it to
additional 'cause marginal
is not in the way we use it is not used
this way
an normal English so just translate it to additional an you have a better shot at
understanding that what we're trying to
convey
so one of the terms you'll see is marginal cost
you can instantly see that as the
additional cost
of the last item produce what was the
additional dollar amount you know we
have a total cost we know how much it cost to produce everything
the producer is thinking about what if I made one
more unit
and it cost twenty five dollars to make
just that one more unit well that would be
the marginal cost
there's also on the consumer side
something called marginal benefit
which is the additional benefit of the last
item consumed it could be
revenue if they're measuring in dollar
terms but marginal benefit could be a
general
term of happiness utility satisfaction as
well
and so we see then in economics at
the optimal allocation of what amount
should be produced and what amount will be bought
is the quantity where you have marginal
benefit equal to marginal cost
and so that's basically what we'll be coming to
repeatedly throughout the semester
particularly as we get to
the later chapters we'll see that
marginal revenue equals marginal cost
so to wrap up this particular lecture our little introduction here
economics is simply the study of choice
simply because
scarcity means you can't have everything
even the richest person in the world
faces scarcity of time all products
should be produced
at the output level where marginal
benefit is equal to marginal cost
and that simply means that the last unit
bought by the household is going to get the
same amount of additional benefit as
additional cost if you produced at a
lower level of
output the marginal benefit of that lower
level output that last item produced will
be higher than the marginal cost
and that's just a market signal that
hey people really want this and that'll
signal to producers to produce more
and if they're producing more than that
would be the flip side the
additional enjoyment and value of that last
unit is lower the marginal cost
an that's a sign that there's too many resources
making this particular product
alright well that'll wrap it up for our
intro thank you very much
