Free Curricula Centre/OCW/Microeconomics

From WikiEducator
Jump to: navigation, search
Luxamart.jpg Construction in progress, expect frequent changes. Some information may be incorrect at this time. Luxamart.jpg

Introduction to Economics

Ask Questions In Our Forum

Have any questions about the materials in this course? Ask them here!

Course Materials

All materials are optimized for mobile devices

 Microeconomics Theory Through Applications by Saylor Academy
 Applied Economics for Africa by George Ayittey PhD
 Macroeconomics: Theory through Applications by Cooper et al

Course Outline

The overall goal of this course is to familiarize students with key terms and models of basic economics, along with learning about how to apply these ideas to business decisions and government policy schemes. Practice working with the economic models should give insight into the real world, but remember that models are employed because they are useful simplifications (see Topic 3). Having a firm grounding in basic economics is merely a first step in understanding economics. Students are encouraged to always keep in mind that economic principles operate in the real world through business competition, politics, and government policies. The challenge of economics is to find models (also known as heuristics) that have explanatory power and are at least conditionally predictive given reasonable parameters. <-- I know this is dense, will think about how to unpack it. --KDR

Topic 0: A Human Science

Read Ayittey Chapter 1: Overview

Read Ayittey Chapter 2: The Economic Problem


Economics Terminology

 Economics is an application of analytic philosophy
 Dismal Science
   Decision Making
 Ceterus Paribus
 Assumption of Rational Actors
 Applied vs Theoretical Economics
 Command Economy
 Free Enterprise
 "Enabling Environment" (Page 12 Ayittey)
 Mixed Economy
 Economic Forecast
 Government Revenue -- Types of Taxes, Tariffs, and Levees
 Gross Domestic Product
 Gross National Product
 Budget Deficit
 Monetary Expansion
 Economic Development
 Standard of Living
 Formal Marketplace
 Special Interest Groups
 Price Controls

Famous Economists

 Aristotle -- economics of the good life
 Adam Smith -- Wealth of Nations
 David Ricardo
 Alfred Marshall
 J.M. Keynes
 Frank Knight
 F.A. Hayek
 John Kenneth Galbraith
 Pigou & Coase
 Elinor Ostrom, first woman Nobel prize winner in Economics

Contemporary figures

 McCloskey -- making economics humane
 Kahneman and Tversky, -- prospect theory
 Vernon Smith -- experimental economics
 Paul Krugman -- New Trade Theory
 Paul Romer -- Free Cities Project
 Current Heads of IMF, World Bank

Commonwealth economists

List of Commonwealth Economists from Ayittey

 Ernest Aryeetey
 Dr. Makhtar Diop
 Dr. Mo Ibrahim
 Donald Kaberuka
 Thabo Mbeki
 Ngozi Okonjo-Iweala
 Ellen Johnson Sirleaf

Remember for Q2C: Important Reasons to Study Econ (Page 1 Ayittey)

Topic 1: Supply and Demand

Read Saylor Chapter 17 Microeconomics Toolkit: Individual Demand, Supply and Demand, and The Labor Market

Read Saylor Chapter 1: What is Economics?, Saylor Chapter 2: Microeconomics in Action
Read Saylor Chapter 3: Everyday Decisions
Read Ayittey Chapter 3: Market Interventionism

Additional reading:

Law of Demand at Khan Academy


Competencies are specific pieces of knowledge students are expected to master. Look for these ideas particularly while you are doing the reading. Students should be familiar with everything covered by the reading.

Opportunity Cost -- The cost of a good is what you give up to get it (at the margin). Specifically, opportunity cost is defined as the value of the best option sacrificed when making a choice(the next best option).*

Marginal Decision Making -- A system of making choices that uses the cost or benefit of incremental units rather than of the whole or total number of units.*

Budget Line -- A line that shows how money in a budget can be allocated between two different goods with intercepts showing maximum values for a particular good.*

Law of Demand -- Demand Curves slope downward. The higher the price, the less quantity of a particular good is demanded.

Shape of Demand Curve -- Shape given by the marginal change in value for each increase and decrease in a good's price relative to all other goods. Elasticity is determined by the slope at a given point in the curve, and will be explained in greater detail in Topic 3.*

Demand vs. Quantity of Demand -- Demand (or Law of Demand or Demand Curve) is the relationship between prices and quantity, while Quantity of Demanded is the number of units demanded at a given price.*

Substitute Goods -- An alternative good to the one primarily considered. If the price of a good goes up, its substitutes will be demanded more to replace the higher priced good.*

Complementary Goods -- A good desired in joint relation to the one primarily considered. If the price of a good increases, its complements will have lower demand.*

Income Effect/ Normal Good -- The effect where an increase in income causes an increase in quantity demanded of a normal good at every price. Right-ward shift of demand curve.*

Income Effect/ Inferior Good -- The effect where increased income causes a decrease in quantity demanded of an inferior good at every price. Left-ward shift of demand curve.*

Substitution Effect -- The effect where the price of a good decreases accompanied by a rightward shift of its demand curve, due to consuming the good having a lower opportunity cost.*

Law of Supply -- Supply Curve (or Market Supply) slopes upward. Higher prices encourage greater quantity supplied

Market Equilibrium -- The intersection of the supply and demand curves. The quantity to be supplied/purchased is determined by the price.*

Questions to consider

1.) Which is more influential over the slope of a budget line, the prices of the goods compared or the amount of income available to purchase those goods?

2.) Harvey is deciding between attending summer semester classes and working a summer job. Ultimately, he decides that the value of furthering his education is greater. What is the opportunity cost of Harvey's choice?

3.) Elise's Discount Magnets see a decrease in demand for their magnets no matter what price they choose following the recent increase in income in their region. What kind of goods are they likely to be selling?

4.) Ivan is considering examples of complementary goods to help teach his microeconomics course. He considers gasoline and cars, laptop computers and webcams, and electric guitars and violin strings. If his goal is to present the best example, which option will he choose and why?

5.) The laws of supply and demand ensure an intersection of the two curves. Why is this intersection important to businesses?

Topic 2: Production and Pricing

Read Saylor Chapter 17 Microeconomics Toolkit: Costs of Production, Possibilities Frontier, Pricing with Market Power, Production Function
Read Saylor Chapter 5 Ebay and Craigslist, Chapter 6 Where Do Prices Come From?

Advanced: Read Wikieducator Production Function. We need guide to approaching the math. Calculus is not required for this course.


Costs of Production,

Total Cost -- The sum of all fixed and variable costs.

Total Cost = Fixed Costs + Variable Costs = Average Costs * Quantity Produced

Fixed Costs -- Unavoidable unchanging costs which only affect the cost of the first unit of production.

  Marginal Cost -- The cost to produce one unit

  Marginal Cost = Change in Total Cost / Change in Quantity = Change in Variable Costs / Change in Quantity 

Sunk Cost -- An expense that has already been incurred. Typically, economists say business owners should ignore sunk costs and focus on marginal costs.

Total Profit -- The difference between the sum of all revenues and the sum of all expenses

Total Profit = Total Revenues - Total Costs

Average Cost -- The quotient of total costs and quantity produced meant to estimate marginal costs.

Average Cost = Total Costs / Quantity Produced

Marginal Profit -- The amount of profit gained by selling one unit.

Marginal Profit = Marginal Revenue - Marginal Cost

Price -- The amount a unit is sold for: Marginal Revenue

Total Revenue -- The amount of income from sales before costs are considered.

Total Revenue = Quantity Sold * Price

Reminder From Topic 1 --The Law of Demand states there is an inverse relationship between quantity demanded and price. Thus, if the firm raises the price, it will sell a lower quantity.

The Derivation of the Firm Supply Curve -- A single firm's supply curve shape is generated by profit-maximizing behavior. A firm has high average costs at startup due to the first marginal unit bearing the entirety of fixed costs. As the quantity produced increases, the average cost will continue to decline, making the marginal cost curve downward sloping. If the firm has to purchase more fixed resources to expand production, average costs will increase again, making marginal costs beyond this point significantly higher.

In a competitive market, the marginal revenue of a firm is determined by the market price of a good. To maximize profits, the firm should sell goods at a quantity where marginal price and cost are equal, and marginal revenue is greater than average cost. Considering a different intersection of price and marginal cost at each price level will generate a series of price-quantity pairs for the firm. This series is the firm's supply curve.

Revenue and Costs of Marginal Units -- In the diagram for marginal revenue and marginal costs visible in Saylor Chapter 6 Figure 6.18, the revenue for marginal units i to j is the sum of the area under the marginal revenue curve. The costs are are the sum of the area under the marginal cost curve.

Revenues - Costs = Profits

In mathematics, these sums are called integrals.

Marginalities -- The marginal changes in the integrals are the derivatives of cost and revenue functions. For a more in depth explanation, Take our Business Calculus Course.

Production Possibilities Frontier -- A curve used to show the different possible combinations of production with current technology and resources. It is convex and downward sloping, which shows the negative relationship (tradeoff) between possibilities.

Production Function -- A function that describes how different combinations of inputs result in particular outputs. Individual inputs tend to have diminishing marginal returns.

For example, in a kitchen of a given size, adding a second cook will add to the production output, but each additional cook will add less value, and eventually, there will be too many cooks and each additional cook will decrease productivity. Similarly, if a cook, buys hundreds of extra pounds of vegetables, it won't increase the amount of prepared meals, as the cook can only chop so many vegetables at once.

Questions to consider

1.) Siraj is responsible for pricing the tires his company, Tire Tech, sells to automotive manufacturers. The price is currently low due to high competition in the market, and the average cost is high due to a recent innovation implemented into the Tire Tech manufacturing process. That considered, marginal cost and price are still equal. His boss Anand is currently displeased with his performance and thinks profit can be further maximized through a pricing change. What can Siraj tell Anand to help explain his pricing choices?

2.) Alicia is in charge of staffing for her local supermarket. She noticed her most recent hire, Raul, added noticeably less to the net productivity of the supermarket than his predecessor Takeda. Raul seems to be putting in as much work as everyone else. Would you recommend Alicia should replace Raul with another more effective worker, hire an additional worker to make up for the missing expected productivity, or continue with her current workforce? Explain your choice.

3.) The local pharmacy just raised their prices on the generic painkiller they offer. What direct result to sales should they expect?

Topic 3: Markets in Action: The Labour Market and Gains from Trade

This topic particularly looks at the labour market

Read otherMaterial: Additional Concepts

Read Micro Chapter 17 Microeconomics Toolkit: Comparative Advantage Read Micro Chapter 8 Growing Jobs

Read Macro Chapter 4 The Interconnected Economy

Read Macro Chapter 8 Jobs in the Macroeconomy

Questions to consider

Topic 4: Modelling Causation, Measuring Correlation: Economics as a Research Programme

Read otherMaterial: Independent and Dependent Variables
Read Micro Chapter 17 Microeconomics Toolkit: Elasticity, Percentage Changes and Growth Rates, Mean and Variance, Correlation and Causality, Comparative Statistics
Read Micro Chapter 7 Why Do Prices Change?, Chapter 16 Cars

Read Macro Chapter 3 The State of the Economy

Read Macro Chapter 5 Globalization and Competitiveness

Read Macro Chapter 7 The Great Depression
Read Ayittey Chapter ?

Add material on Introduction to Business and Social Science Research

Keeping up with Economic news: government and private data sources, blogs, reading journal articles


Note if you have any difficulties with the mathematics here, please reference our Business Maths course and materials. Percentage change, for example is in Business Maths Topic 1: Chapter 3. Link--> Business Maths

Mean and Variance -- Mean refers to arithmetic mean which is found by the sum of all data points in a set divided by the total number of data points in that set. Variance is the idea of measuring how much data differs from a metric on average defined as the sum of each datapoint's absolute distance from the mean.

Mean = (Value1 + Value 2 + ... LastValue)/QuantityOfValues

Variance = (Value1 - Mean) + (Value2 - Mean) + ... (LastValue - Mean) 

Percentage Change -- The percentage change is a measurement of how much some value has changed in relation to its previous value.   

Percentage change = [(Current value - previous value) / previous value] * 100

Growth Rate -- A metric found by measuring percentage change over a given time period.

Independent and Dependent Variables -- Independent variables are the subjects of a study, and their variation is determined by the initial factors. Dependent variables are the outcomes of a study. Independent variables drive the outcome of dependent variables. For example, let's say Derek has a lawn mowing service. He notices that the rain makes grass grow faster than normally. His neighbors call him in more often than usual  after a big rain.  He finds he can charge more money for his normal service, such that for every cm of rain, he can charge 50 kobo more per lawn mowing.

50*rainInCentimeters = extraRevenue

Correlation and Causality -- Correlation is the degree that two properties move together when other independent variables change. An example being that grass seems to grow faster when more rain falls. Causation is similar to correlation, but it is directional. The test of causation is whether in the absence of the independent event, would the dependent event have happened. An example being higher rainfall caused faster grass growth as proven by lack of rain accompanying no grass growth.

Elasticity -- A ratio used to measure  the responsiveness of changes of one property to changes in another. For example:

Elasticity = Percentage Change in Property/ Percentage Change in Other Property

Price Elasticity of Demand -- A measure of the responsiveness of quantity demanded to changes in price.

Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price

Here demand is relatively elastic or not responsive to price changes if the absolute value of the elasticity is greater than 1. This is because the percentage change in quantity demanded is greater than the percentage change in price.

Alternatively, if the Percentage Change in Price is larger, we have a relatively inelastic demand, as the large change in price, does not beget a larger change in quantity demanded.

Income Elasticity of Demand -- Instead of price, this ratio focuses on how much quantity demanded changes according to the changes in income.

Questions to consider

1.) How can elasticity be used to explain the relationships between inferior, complementary, normal and substitute goods and changes in price or demand?

2.) Dr. Rogerstein is considering a study of the effects of industrial growth in several west African countries. He is specifically considering the changes of size in manufacturing and agricultural industries on a national level, and resulting changes in average income. Classify the ideas of his study as independent or dependent variables, and explain your reasoning.

3.) Anita notices that sunflowers seem to grow faster when the tomatoes in her garden are ripening. What can she do to determine if this is an example of causation or merely correlation?

4.) A boulder is at rest in the middle of a field. Muhammad attempts to push the boulder every morning as a part of his daily exercise routine. The boulder does not move very far, unless Muhammad exerts significant pressure upon it. Describe the relationship between the movement of the boulder and the effort Muhammad puts into moving it in terms of elasticity.

Topic 5: Choices Over Time and The Credit Market and Investment Market

Add to choices over time: Solo Growth Model, Macro Savings Investment

Read otherMaterial: Additional Concepts
Read Saylor Chapter 17 Microeconomics Toolkit: Choices Over Time, Discounted Present Value, Expected Value, The Credit Market

Read Saylor Chapter 4 Life Decisions

Read Saylor Chapter 9 Making and Losing Money on Wall Street: The Value of an Asset, Asset Markets and Asset Prices


Nominal --

Real --

Intertemporal-Budget Constraint -- A relationship that shows periodic combinations of consumption and savings. It shows that you have to borrow if you want to spend more than you earn in the present, and that you have to save if you want to spend more than you earn in the future.

Equations for borrowing/consumption need to be re-written to reflect the tradeoffs between current and future periods. -KDR

Without Borrowing:

Income = Consumption This Year + Savings Now

Income + Savings = Consumption Future + Savings Future

With Borrowing(Here we assume that one cannot borrow and save simultaneously):

Income + Borrowing = Consumption This Year

Income + Borrowing = Consumption Future


Notes on Fig. 17.3 to be inserted using JsGraphing i.e. D3

Real Interest Factor -- Slope of Budget Line

1 + Real Interest Rate = Real Interest Factor

Discounted Present Value --

Expected Value --

Inflation Rate --

(Price Level Next Year / Price Level This Year) -1 = Inflation Rate

Correcting for Inflation --

Real Interest Rate ~= Nominal Interest Rate - Inflation Rate

Real Interest Factor ~= Nominal Interest Factor - Inflation Rate

Fisher Equation --

*Consider Squeezing Credit and Investment Market into this Chapter*

Discounted Present Value --

Discounted Present Value of Two-Year Flow of Nominal Income = Nominal Income this Year + (Nominal Income Next Year / Nominal Interest Factor)

Adding Nominal Consumption Over Two Periods --

Questions to consider

Topic 6: The Geometry of Maximizing Net Benefits, Game Theory, and Cooperation

Read Micro Chapter 17 Microeconomics Toolkit: Buyer and Seller Surplus, Efficiency and Deadweight Loss, Externalities and Public Goods, Nash Equilibrium Read Micro Chapter 10 Raising the Wage Floor, Chapter 11 Barriers to Trade and the Underground Economy, Chapter 13 Cleaning up the Air and Using up the Oil

Prisoner's Dillemma

What Elinor Ostrom said about Prisoner's Dillema

Externalities and Coasian Bargaining

Questions to consider

Topic 7: Public Policy

Read Macro Chapter 12 Income Taxes

Read Macro Chapter 14 Balancing the Budget

Questions to consider

Topic 8: Development Economics: Looking at Africa

Read Macro Chapter 6: Global Prosperity and Global Poverty

Read Ayittey Chapter 5: The African Development Conundrum

Read Ayittey Chapter 6: The Enduring Lessons

Read Ayittey Chapter 7: the Real Obstacles to Africa's Development

Read Ayittey Chapter 8: Fixing Africa

Read Ayittey Chapter 9: The New Developmental Model

Questions to consider

Topic 9: Inflation, Foreign Exchange, and Money Markets

Big and small countries

Currency hedging, e.g. the Swiss Franc

Money neutrality?

Central banks, free banking, and crypto-currencies

Read otherMaterial: Additional Concepts
Read Micro Chapter 17 Microeconomics Toolkit: Correcting for Inflation, Foreign Exchange Market

Read Macro Chapter 9 Money: A User's Guide

Read Macro Chapter 10 Understanding the Fed

Read Macro Chapter 11 Inflations Big and Small

Questions to consider

Topic 10: Review

Review previous topics. Are you ready to sit the assessment and earn credit for this course? If so, and you haven’t already done so, join our community!