Microeconomics 2

nd
canadian edition author: Paul Krugman and Robin Wells
Microeconomics: is the study of individual markets in the economy
Macroeconomics: is the study of the functioning of the overall economy example: unemployment and
recessions
Opportunity cost: production possibility frontiers
Economics is the social science that studies the production, distribution and consumption of goods
(tangible) and services (intangible)
Every economics issue involves individual choice decisions by individuals about what to do and what not
to do
Classic definition:
Economics is the study of how people make choices under conditions of scarcity and what the results
those choices are for society
The choices matter because theres scarcity
What is scarce?
Resources (factors of production):
Land:
1- air
2- land, minerals
Labor: + human capital
Capital: factories, machinery, equipment
This is the general classification of the general resources.
We have to make decisions about how to use those resources because they are scarce relative to the
number of uses we have for them
Question: Are economic resources really scarce?
Example: teaching there are no enough teachers in a way that everyone gets 1v1 education

How do people make economic choices?
Making decisions is made by looking at the benefits and comparing them with the costs
For suppliers the benefit is maximizing the profit and the cost is the cost of labor and production
Any microeconomic decision is made by comparing the benefits to the cost
What are the costs?
Opportunity cost: the cost of taking an action is measured by the value of the next best alternative
action
Opportunity cost = value of the alternative foregone (value of the benefit that could have been
generated by the resources in their next best use)
Based on the scarcity of resources if you do something you have to give up doing something else
The cost of taking an action is based on the value of the best next alternative

What is the best opportunity cost of going to university? (What do you give up when you go to
university?)
You should consider the value of the time you spend in university since you couldve spent it working

Should you include your apartment rental, food and entertainment costs as part of the opportunity cost
of going to university?
Depends on whether its linked to going to university and if it is only going to be part of your costs if you
go to university
So it is generally not part of the opportunity cost
Explicit costs (tuition fees) and implicit costs (value of time). Both are part of the opportunity costs. Both
are given up when the auction is taken.
What is the opportunity cost of getting married?
The loss of freedom and other things you cant do if youre married.
What is the opportunity cost of a month-long vacation?
Explicit costs: spending for entertainment
Implicit costs: loss of time and loss of wages
Does it depend when you take it? Yes because costs differ from time to time throughout the year and
because of the holidays.
Does opportunity cost really matter? Do we make decisions according to opportunity cost?
Example: only people under 20 go to university because if we look at the implicit costs students at this
age have a low value time because they dont have a high capacity to earn; however, older people are
less likely to go to university because of their high value of time
In a market economy, individuals make choices about demand and supply and then markets bring those
individual decisions together
There are trade-offs everywhere
There is no such thing as free lunch
Because it is always true that there is a cost for something and because there is always something other
than that to do with the resources
Production possibility frontier will help us think about issues like choices, opportunity costs, and
economic efficiency

Attainable region is the area under the graph in the PPF graph
Unattainable region is the area out of the graph which cannot be reached because of the limitation of
resources
Opportunity cost will be the derivative because is the rate of change of y with respect to x
Opportunity cost of x is the ratio dy/dx