Differences in Earningsin the U.S. Today The typical physician earns about $200,000a year. The typical police officer earns about$50,000 a year. The typical farm worker earns about$20,000 a year

The Theory of Consumer Choice The theory of consumer choice addresses the following questions: – Do all demand curves slope downward? – How do wages affect labor supply? – How do interest rates affect household saving?

Outline The economics of asymmetric information Political economics Behavioral economics

Outline The Economist as Scientist The Economist as Policy Adviser Why Economists disagree

The Market Forces of Supply and Demand Supply and Demand are the two wordsthat economists use most often. Supply and Demand are the forces thatmake market economies work. Modern microeconomics is about supply,demand and equilibrium

Importance of Supply-Demand Analysis A little knowledge goes a long way: Price Control, Taxation and other policies. Market welfare: Normative Analysis International Trade Externality (Market Failure) Market Power (Market Failure) Other markets: Financial Market, Labor Market. Macroeconomics

Revisiting the Market Equilibrium Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? Market equilibrium reflects the way markets allocate scarce resources. Whether the market allocation is desirable is determined by welfare economics

Elasticity… … is a measure of how much buyers and sellers respond to changes in market conditions … allows us to analyze supply and demand with greater precision

“The best things in life are free. . .” Free goods provide a special challenge foreconomic analysis Most goods in our economy are allocatedin markets… for these goods, prices are the signalsthat guide the decisions of buyers andsellers

The Law of Supply Firms are willing to produce and sell agreater quantity of a good when the priceof the good is higher. This results in a supply curve that slopesupward