Microeconomics Demystified: A Self-Teaching Guide docx

[...]... two variables, as depicted in Figure 2-1 It is a common convention to call the variable on the horizontal or X axis the independent variable and the variable on the vertical or Y axis the dependent variable The intuition behind this terminology is that the variable on the horizontal axis is an action variable, whereas the variable on the vertical axis is a reaction variable The reaction of one variable... somewhat efficient manner, using a language that all economists can understand (even if they don’t always agree!) There are two basic approaches to economics: the intuitive and the mathematical These approaches are not mutually exclusive, however, they do require different tools Many economics textbooks are full of mathematical symbols and complicated statistical analyses accompanied by very little explanatory... little explanatory language; the language is mathematics and as long as one understands that language, everything intended is communicated The alternative to the heavily mathematical treatment of economic concepts is the purely intuitive which relies upon long explanations, consisting of pages of text to describe in excruciating detail the same basic issues that the mathematical approach address The... variable X increases by one unit However, by the time the variable X has reached a value of 3, the reaction of variable Y is not as dramatic At Point A, the slope is –1, indicating that if the variable X increases by one unit, the variable Y declines by one unit At Point C, the slope of –1/9 indicates that if the variable X increases by one unit, the variable Y will only decline by 1/9 of a unit As... out to be bad decisions For example, an individual who uses drugs is not acting rationally according to many people However, given the information the drug user has at the time, continuing to abuse drugs might actually be a rational, even if bad, choice CHAPTER 1 The Language of Economics 7 However, local nonsatiation can also be confusing What local nonsatiation implies is that people generally desire... it is true that economists speak a different “language” in the sense that we often use terms that are not common in everyday conversation For example, economists use terms such as the natural rate of unemployment, the elasticity of demand, opportunity cost, and comparative advantage These terms are nothing more than a shorthand way of conveying a general concept that all economists understand, even if... of income, and provides a structure of laws in which firms and households can operate with some level of certainty Governments are organized, manned, and managed by households Agents interact in an economy An economy is an overarching mechanism that facilitates the allocation of scarce resources to competing uses An economy decides three things: (a) what goods are produced and in what quantities, (b)... is that very simple models can help us understand the more complicated reality around us Production in a Robinson Crusoe Economy As discussed in Chapter 1, a model is a set of assumptions that lead to a specific set of implications Every economic model has three basic assumptions: rationality, preference, and local nonsatiation Local nonsatiation implies that individuals always prefer more of a good... Sometimes, the assumptions of an economic model may seem silly, but they always have some reason for being included in the model The assumptions of a model lead to a set of logical or mathematical implications With the same assumptions, every economist will arrive at the same conclusion The reason many economists disagree is that they often disagree with each other’s assumptions As an example, consider a simple... you might want a new car but are unable to afford one; you face scarcity in your disposable income Another person may easily afford a new car, but wants to spend more time with her family Still another person might want a job as a taxidermist in Ames, Iowa, when there is no job to be had This person would face a scarcity in the job market, perhaps not of their own volition, but a scarcity nonetheless . Many economics textbooks are full of mathematical symbols and complicated statistical analyses accompanied by very little explanatory language; the language. language is mathematics and as long as one understands that language, everything intended is communicated. The alternative to the heavily mathematical