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ECON 1B03 (302)
Chapter 1

Microeconomics Chapter 1 Textbook notes.docx

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McMaster University
Krishnakali Sen Gupta

Microeconomics: Chapter One 10 Principles of Economics 1) People Face Tradeoffs 2) The Cost of something is what you give up to get it (opportunity cost) 3) Rational People look at the margin 4) People respond to incentives 5) Trade can make everyone better off 6) Markets are usually a good way to organize economic activity 7) Governments can sometimes improve market outcomes 8) A country’s standard of living depends on its ability to produce goods and services 9) Prices rise when the government prints too much money 10) Society faces a short-run trade off between inflation and unemployment How people make decisions: 1. People Face Tradeoffs: Making a decision requires trading one goal against another. For example: One hour studying economics is costing you one hour of doing other things (working, watching TV, biking etc) 2. The Cost of Something Is What You Give up to Get It: Opportunity cost 3. Rational People Think At The Margin: People usually make decisions comparing marginal benefits to marginal cost. Marginal Benefits HAVE to be larger than Marginal Cost 4. People respond to incentives How people interact: 5. Trade makes everyone better off: Trade allows a country to specialize in what they do best and to enjoy a greater variety of goods and services. 6. Markets are usually a good way to organize economic activity: An economy driven by the decisions of millions of households and firms. 7. Governments can sometimes improve market outcomes: by putting in policies and taxes to improve equity and efficiency. How the Economy Interacts as a Whole: 8. A country’s standard of living depends on its ability to pro
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