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Principle of Microeconomics (Principles #5-8)

2 Pages
Spring 2014

Course Code
ECON 1116
Irena Tsvetkova

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Principle of Microeconomics (Principles #5-8)
How people interact
Principle #5: Trade can make everyone better off
Rather than being self-sufficient, people can specialize in producing on good or
service and exchange it for other goods
Countries also benefit from trade and specialization
oGet a better price abroad for goods they produce
oBuy other goods more cheaply from abroad than could be produced at home
Principle #6: Markets are usually a good way to organize economic activity
Market: A group of buyers and sellers (Not necessarily in the same location)
“Organize economic activity”: Means determining
oWhat goods to produce
oHow to produce them
oHow much of each to produce
oWho gets them
Market economy: Allocates resources through the decentralized decisions of many
households and firms as they interact in markets
Father of economics: Adam Smith
oThe Wealth of Nations (1776)
oEach of these households and firms acts as if “led by an invisible hand” to
promote general economic well-being
oThe invisible hand works through the price system:
The interaction of buyers and sellers determines prices
Each price reflects the good’s demand curve value to buyers and the
cost of producing the good

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Principle of Microeconomics (Principles #5­8) How people interact Principle #5: Trade can make everyone better off • Rather than being self­sufficient, people can specialize in producing on good or  service and exchange it for other goods • Countries also benefit from trade and specialization o Get a better price abroad for goods they produce  o Buy other goods more cheaply from abroad than could be produced at home Principle #6: Markets are usually a good way to organize economic activity • Market: A group of buyers and sellers (Not necessarily in the same location) • “Organize economic activity”: Means determining  o What goods to produce o How to produce them o How much of each to produce o Who gets them • Market economy: Allocates resources through the decentralized decisions of many  households and firms as they interact in markets • Father of economics: Adam Smith o The Wealth of Nations (1776) o Each of these households and firms acts as if “led by an invisible hand” to  promote general econom
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