10 Principles of Microeconomics - Sept 11th 2012
Microeconomics deals with the study of:
-individual households and firms
-equilibrium in particular markets
Macroeconomics deals with the study of economic aggregates such as…
• …and economic growth
Scarcity refers to the limited nature of society's resources.
Economics is the study of how society manages it scarce resources, including:
Microeconomics is mainly interested in:
-the study of the allocation of scarce resources which are:
-...resources with alternative uses
*Scarcity does NOT mean limited it means alternate uses.
How People Make Decisions
Principle 1: People Face Tradeoffs
ex. going to party night before exam leaves less time to study.
ex. Having more money to buy stuff means working longer hours
Society faces an important trade-off: efficiency vs. equity
efficiency: getting most out of scarce resources
equity: distributing prosperity fairly among society's members
NO SUCH THINGAS FREE but redistribute with least efficiency cost
Principle 2: The Cost of Something is What You Give Up to Get it
-Making decisions requires comparing the costs and benefits of alternative choices.
-The opportunity cost of any item is whatever must be given up to obtain it.
It is the relevant cost of decision making
Opportunity cost are the costs of:
-using resources for a particular purpose
-measured by the benefit of not using them
-in their next best alternative use
Opportunity costs include...
Explicit Costs: out of pocket expenses Implicit costs: such as foregone earnings (time)
...do not include
Sunk Costs: unrecoverable costs (lost money)
Principle 3: Rational People Think at the Margin
-Rational means to do the best they can to achieve their objectives
Principle 4: People Respond to Incentives
Rational people respond to incentives
ex. cars with better gas mileage. (compare costs to benefits)
Principle 5: Trade Can Make Everyone Better Off
Make more money specializing by producing one good or service and exchange it for other
Countries also benefit from trade & specialization: