Econ104 Introduction to Microeconomics
Lecture 1: Principles of Economics
Textbook Chapter 1, pages 3-18
In Class Notes
Utility for satisfaction – maximization of differs between people; different
people derive utility (happiness) from different things. This means
consumers have different preferences.
E.g. World Vision; Sponsoring a Child $40/month vs. Drinking Beer weekly
Key Economic Principles:
(6 main principles covered in course)
1. People face trade-offs; people constantly face trade-offs because of scarcity
of resources, income, time etc.
2. The cost of something is what you have to give up to get it; the true cost of
any choice includes the opportunity cost, which is defined as the next best
alternative foregone when making a decision. Opportunity cost includes the
actual cost and the utility expected of the alternative.
3. People respond to incentives; understanding economic incentives is crucial
in explaining the behavior of individuals and groups.
Sometimes government policy can have perverse or unintended
E.g. Seatbelt legislation; People who wear seatbelts drive faster due to safer
feeling, as a result the number of pedestrians and cyclists killed increased.
4. Markets are usually a good way to organize economic activity.
5. Governments can sometimes improve market outcomes; they can also make
them worse as well. A politicians’ number one goal is to be re-elected.
E.g. 1: Petrol Sticker legislation- Rather than not driving on the day of the
week stickered people purchased another car with an alternative sticker.
E.g. 2: Communism in Poland and the dictation of toilet paper and meat
supply resulting in shortages.
6. The role of information; information is important in the efficient allocation
and use of scarce resources.
E.g. 1: Ladies of the pen – woman are in jail after further investigation.
E.g. 2: Purchasing a car – Asymmetric Information resulting in bad
Voluntary trade can make everybody better off; this comes with the
assumption that there are no negative effects from trade due to the
Markets are usually a good way to organize economic activity; government
decisions have an ability to cause shortages.
The role of information is important in markets; complete information
allows for greater efficiency. Marginal analysis is import