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Chapter 1

ECON 101 Chapter Notes - Chapter 1: Predatory Pricing, Market Economy, Marginal Cost


Department
Economics
Course Code
ECON 101
Professor
Ratna Shrestha
Chapter
1

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10 Principles of Microeconomics
Economics is the study of:
How society manages its scarce resources
How people make decisions:
1. People face tradeoffs:
o Because of limited resources, to get one thing, you give up another
o e.g.: efficiency vs equity
2. Cost of something is what you give up to get it (opportunity cost):
o Decisions require comparing costs & benefits of alternatives
o Include monetary paid (explicit cost) & monetary value (implicit cost)
3. Rational people think at margin:
o Economists assume people are rational
o Purchase goods that allows greatest level of satisfaction given
income & price
Aim is to maximize profit
4. People respond to incentives:
o Decisions based on benefit or detriment (e.g. sales, baby bonus)
How people interact:
5. Trade can make everyone better off:
o Allows for specialization in products that benefit countries
6. Markets are usually a good way to organize economic activity:
o Movement: centrally planned economies market economies
o Market economy: allocates resources thru decentralized decisions of
many firms
o Market prices reflect value of product & cost to consumers
o Competitive market = better price, variety, accessibility
7. Governments can sometimes improve market outcomes:
o Market fails government interferes to promote efficiency & equity
o Examples of market failure:
Externality, market power, asymmetric information,
predatory pricing
How the economy as a whole works:
8. Standard of living depends on country’s productivity:
o To boost standard of living, policy makers need to raise productivity
Ensuring workers are well-educated, have tools needed to
produce goods & have access to technology
9. Prices rise when government prints too much money (loses value):
10. Society faces a short-run tradeoff between inflation & unemployment:
o Plays a key role in analysis of business cycle
e.g. employment, production
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