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Chap 1-10 Principles of Economics.docx

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Angela Trimarchi

10 Principles of Microeconomics - Sept 11th 2012 Microeconomics deals with the study of: -individual households and firms -equilibrium in particular markets -relative prices Macroeconomics deals with the study of economic aggregates such as… • …inflation • …unemployment • …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) 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 goods.  Countries also benefit from trade & specialization:
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