UNIT 1: INTRODUCTION TO ECONOMICS
Unit 1: Introduction to Economics
Part 1: What is Economics?
Chapter 1
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What We Will Learn
1. What is economics?
2. What are the assumptions of human behaviour?
3. What is the main economic problem that societies face?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What is Economics?
Economics is the study of human behaviour and choice:
‒ What choices do people make?
‒ What factors influence those choices?
‒ What are the consequences of those choices for the person making them?
‒ What are the consequences of those choices for others?
Opportunities and choices are limited by scarce resources:
‒ We have limited money.
‒ We have limited time.
‒ We have limited materials.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What is Economics?
We consider three perspectives:
1. Consumers
2. Managers
3. Government Policymakers
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Assumptions about Human Behaviour
We making three main assumptions about human behaviour:
1. People are rational
‒ People make decisions they believe will make them happy or better off.
‒ People will act in their own self-interest.
‒ We will return to this assumption in Unit 6.
2. People respond to incentives
‒ When a particular option becomes more attractive, people will be more likely
to select it.
3. People use Cost-Benefit Analysis
‒ People compare the Marginal Benefit (MB) and Marginal Cost (MC) of each
option before making a decision.
‒ Only options with a positive Net Benefit will be selected.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
The Economic Problem
All societies face a basic economic problem:
Societies have Limited Resources,
but People have Unlimited Wants.
When we devote resources to one type of activity, those same
resources cannot be used for a different type of activity.
Societies face trade-offs.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
The Economic Problem
Our three main economic questions:
1. What goods and services will be produced?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
The Economic Problem
Our three main economic questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
The Economic Problem
Our three main economic questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Unit 1: Introduction to Economics
Part 2: Economic Systems
Chapter 1
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What We Have Learned
Our three main economic questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What We Will Learn
1. What are the types of economic systems?
2. What is the Efficiency vs. Equity trade-off?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Types of Economic Systems
1. Market Economy
2. Centrally-Planned Economy
3. Mixed Economy
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Market Economy
In a market economy, the answers to all three of our main
economic questions are determined solely by the private sector –
that is, made up of individuals and businesses that operate for a
profit. The public sector – the government, does not try to
influence the market outcome.
Firms decide what to produce and how much to charge.
Consumers decide how much to buy.
Market economies are characterized by an absence of state
intervention.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Market Economy
The classical liberal philosophers explained the basics of the market
economy system and promoted its use.
Today, we often use the term neo-liberal or neo-classical to
describe economists who advocate for a free-market economy.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Market Economy
Advantages Disadvantages
Resources are usually allocated They underproduce some types
efficiently with respect to production. of goods that are beneficial to
individuals and to society as a
whole.
Market economies foster innovation
and entrepreneurship.
They can generate substantial
levels of inequality – resources
People are free to choose, and the are often not allocated efficiently
government does not have to with respect to consumption.
choose for them.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Socialism and the 19th and 20th Centuries
Market-driven inequality in 19th century led to the creation of the
socialism philosophy.
Socialism emphasizes community ownership of business:
‒ Co-operatives
‒ State-Owned Enterprises (SOEs)
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Centrally-Planned Economy
If all (or most) businesses in the economy are state-owned
enterprises, we call it a communist economic system.
In a centrally-planned economy, the government decides what is
produced and directs resources to meet these targets.
20th Century communist economies were centrally-planned, but not
all centrally-planned economies were communist!
The government may also decide how output is distributed to
consumers, for example through rationing.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Centrally-Planned Economy
Advantages Disadvantages
Rationing reduces inequality. Production is usually not efficient.
Can allocate societal resources It is difficult for the government to
more efficiently than a free market choose the right targets and
in times of national emergency. allocate resources.
Lack of innovation.
Underperforms market economies
in overall production.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Mixed Economy
A mixed economy combines elements of both market economies
and central-planning.
In mixed economies most types of goods are provided by the
private sector – by businesses owned by individuals. However,
the government may influence or regulate some aspects of the
market.
The public sector – the government – also provides some types
of goods and services directly, such as through state owned
enterprises.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Mixed Economy
The extent to which the government provides goods and services
in a mixed economy varies from country to country.
Since the 1980s, neo-liberal economists have successfully argued
for governments in Western Europe and North America to adopt a
policy of deregulation and sell some state-owned enterprises.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Mixed Economy
Mixed economies attempt to obtain the advantages of both free
markets and central-planning while avoiding the disadvantages of
either type.
But, in practice we will face trade-offs which mean we cannot fully
capture all the benefits or avoid all the consequences of each type.
Most economists and policymakers agree that a mixed economy is
best, but they disagree on how much or how little the government
should be involved. In democracies, citizens can decide through
voting.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Efficiency vs. Equity
Market economies are more efficient than centrally-planned
economies.
‒ Productive efficiency: goods and services are produced at the lowest possible
cost.
‒ Allocative efficiency: a society’s resources are used to produce a mix of goods
and services that consumers actually want to buy.
Markets function well because of voluntary exchange.
Equity refers to a “fair” distribution of resources. What exactly
is considered fair though is open to interpretation. Unfortunately,
Government attempts to improve equity will usually reduce efficiency.
ECON 2ZZ3 “Intermediate Microeconomics II” explores this topic further.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Unit 1: Introduction to Economics
Part 3: How Economists Work
Chapter 1
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What We Will Learn
1. How do economists work?
2. What are Microeconomics and Macroeconomics?
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
How Economists Work
To study how economic decisions are made and the outcomes
these decisions produce, economists develop theories, also called
models. We follow these five steps:
1. Decide on the assumptions to use in developing the model.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data well.
5. Retain the revised model to help answer similar economic
questions in the future.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Formulating Assumptions
We start by making assumptions about how individuals will behave in
certain situations.
Typically, we assume people are rational.
Our assumptions will be used to predict behaviour and the outcomes of
decisions.
‒ Ex. If the price of paper towels goes down, we assume more people will buy them.
To see if our assumptions are correct, we will proceed through the next
steps.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Testable Hypotheses
Given the assumptions we have made, we can now make a
prediction about an observable and measurable outcome.
A hypothesis is a statement about an economic variable that can
either be proved correct or incorrect. Usually, our hypothesis will
specify a causal relationship where a change in one variable
causes another variable to change.
‒ Ex. Lowering the price of paper towels will cause the quantity of paper
towels sold to increase.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Using Economic Data
To test hypotheses, we collect data on how the economic variables
of interest are changing.
If the variable changes in the way we hypothesized, then we
conclude our hypothesis was correct. If the variable does not
change in the way we hypothesized, then we will need to modify
our starting assumptions to generate different predictions that fit
our observations.
We may need to revise our assumptions several times to develop
a model which accurately predicts what we observe in the real
world.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Positive vs. Normative Analysis
Positive analysis concerns facts or logic. It is simply focused on
what “is” and what “could be”.
Normative analysis makes value judgments about whether what
“is” or what “could be” is desirable or not.
Many economists tend to focus on positive analysis, simply stating what
we observe to be happening in the real world, and what could happen
when a new decision is made. Business managers, government
policymakers, journalists, and others may interpret our findings in
different ways and argue for or against different decisions based on
whether they believe the predicted outcomes are desirable or not.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Microeconomics vs. Macroeconomics
Microeconomics:
‒ Focuses on individual agents and markets.
‒ Considers the behaviour of individual consumers, workers, and firm managers.
‒ Examines production and efficiency for individual goods and services.
‒ Examines how the government can impact the market for specific goods and
services.
Macroeconomics: ECON 1BB3 “Introductory Macroeconomics”
‒ Focuses on the whole economy in aggregate, particularly economic growth, total
income, inflation, and unemployment.
‒ Considers the overall outcome of all household consumption decisions.
‒ Examines overall business activity and employment without differentiating by
sector or product.
‒ Examines the overall impact of government actions on the whole economy.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
How to do economics
All aspects of economics can be explained in one of three ways:
1. With words
2. With graphs
3. With equations
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Unit 1: Introduction to Economics
Part 4: Math Review
Chapter 1
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
What We Will Learn
Math Review!
1. Basic functions
2. Graphing
3. Solving Equations
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Basic Functions and Graphs
A function is an equation that 𝑦𝑦
tells us about the relationship
between two variables.
We can display functions on a
graph with the values of one
variable (x) shown on the Origin: 𝑥𝑥 = 0, 𝑦𝑦 = 0
horizontal axis and the values
of the other variable (y) shown
on the vertical axis. 0 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Basic Functions and Graphs
𝑦𝑦
Each point on the graph
represents a set of coordinates.
15 6,15
We always write the 𝑥𝑥-coordinate 9 3,9
first.
0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Basic Functions and Graphs
𝑦𝑦
A linear function is a straight line.
15 6,15
In economics we typically use
linear functions because: 9 3,9
1. They are easy to draw.
2. They often provide a good
approximation if the true
relationship is not linear. 0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Basic Functions
𝑦𝑦
A linear function:
𝑦𝑦 = 𝑚𝑚𝑚𝑚 + 𝑏𝑏
15 6,15
where: 9 3,9
𝑚𝑚 is the slope of the function
𝑏𝑏 is the y-axis intercept 𝑏𝑏
0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Finding the Slope
𝑦𝑦2 − 𝑦𝑦1 𝑦𝑦 𝑚𝑚 > 0 → upward sloping
𝑚𝑚 =
𝑥𝑥2 − 𝑥𝑥1
15 6,15
15 − 9
𝑚𝑚 =
6−3 9 3,9
6
𝑚𝑚 = 𝑏𝑏
3
0 3 6 𝑥𝑥
𝑚𝑚 = 2
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Finding the Slope
To find the intercept, we can
use the slope plus one of the 𝑦𝑦
points:
𝑦𝑦2 − 𝑦𝑦1
𝑚𝑚 = 15 6,15
𝑥𝑥2 − 𝑥𝑥1
15 − 𝑏𝑏 9 3,9
2=
6−0
𝑏𝑏
15 − 𝑏𝑏
2= 0 3 6 𝑥𝑥
6
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Finding the Slope
Rearrange by using opposite 𝑦𝑦
operations:
15 − 𝑏𝑏
2= 15 6,15
6
15 − 𝑏𝑏 9 3,9
6 2= 6
6
𝑏𝑏
12 = 15 − 𝑏𝑏
0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Finding the Slope
Rearrange by using opposite 𝑦𝑦
operations:
12 = 15 − 𝑏𝑏
15 6,15
12 − 15 = 15 − 𝑏𝑏 − 15
9 3,9
−3 = −𝑏𝑏
𝑏𝑏
0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Finding the Slope
Rearrange by using opposite 𝑦𝑦
operations:
−3 = −𝑏𝑏
15 6,15
−1 −3 = −1 −𝑏𝑏
9 3,9
𝑏𝑏 = 3
3
𝑏𝑏
0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
An Upward Sloping Linear Function
Therefore, this line can be 𝑦𝑦
presented as the linear function:
𝑦𝑦 = 2𝑥𝑥 + 3
15 6,15
A 1 unit increase in 𝑥𝑥 corresponds 9 3,9
to a 2 unit increase in 𝑦𝑦.
3
When 𝑥𝑥 = 0, 𝑦𝑦 = 3.
0 3 6 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
A Downward Sloping Function
We can consider the function: 𝑦𝑦 𝑚𝑚 < 0 → downward sloping
23
𝑦𝑦 = −3𝑥𝑥 + 23
When 𝑥𝑥 = 0, 𝑦𝑦 = 23.
A 1 unit increase in 𝑥𝑥 corresponds
to a 3 unit decrease in 𝑦𝑦.
0 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Intersection of Two Functions
Suppose we have two functions: 𝑦𝑦
23
𝑦𝑦 = 2𝑥𝑥 + 3
𝑦𝑦 = −3𝑥𝑥 + 23
? ?,?
𝑦𝑦 = 𝑦𝑦
3
2𝑥𝑥 + 3 = −3𝑥𝑥 + 23
0 ? 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Intersection of Two Functions
𝑦𝑦
2𝑥𝑥 + 3 = −3𝑥𝑥 + 23 23
2𝑥𝑥 + 3 + 3𝑥𝑥 = −3𝑥𝑥 + 23 + 3𝑥𝑥
? ?,?
2𝑥𝑥 + 3 + 3𝑥𝑥 = 23
5𝑥𝑥 + 3 = 23 3
0 ? 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Intersection of Two Functions
𝑦𝑦
5𝑥𝑥 + 3 = 23 23
5𝑥𝑥 + 3 − 3 = 23 − 3
? ?,?
5𝑥𝑥 = 20
0 ? 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Intersection of Two Functions
𝑦𝑦
5𝑥𝑥 = 20 23
5𝑥𝑥 20
=
5 5
? 4, ?
20
𝑥𝑥 =
5 3
𝑥𝑥 = 4 0 4 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Intersection of Two Functions
Since:
𝑦𝑦
𝑦𝑦 = 2𝑥𝑥 + 3
23
and
𝑦𝑦 = −3𝑥𝑥 + 23 ? 4, ?
we can use either equation to
solve. Both will give the same 3
answer if we have done our work
properly. 0 4 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Intersection of Two Functions
Since 𝑥𝑥 = 4, therefore:
𝑦𝑦
𝑦𝑦 = 2 4 + 3 23
𝑦𝑦 = 11
11 4,11
Also:
𝑦𝑦 = −3 4 + 23 3
𝑦𝑦 = 11 0 4 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 1: INTRODUCTION TO ECONOMICS
Non-Linear Functions
Non-linear functions have a
slope that changes at every 𝑦𝑦
point.
For any given point, we can find
the slope of the curve by
examining the slope of a
tangent line.
We will not be calculating the
slopes of non-linear functions in
this course. 0 𝑥𝑥
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
