Ten Principles of Microeconomics Scarcity o Society has limited resources and therefore cannot produce all the goods and services people wish to have Economics o The study of how society manages its scarce resources Faced with the scarcity every society has to answer the following 3 questions o What goods and how many of them should be produced o What resources should be used in production o At what price should the goods be sold Micro vs macro o Micro Individuals making decisions o Macro Focuses on the economy as a whole Ex Unemployment rate etc Video notes People face tradeoffs Opportunity costs o Ex Kobe Bryant not going to college and going prom Rational people think at the margin Trade can make everyone better off Gov t can sometimes improve market outcomes How people make decisions o People face tradeoffs o Opportunity cost The cost of something is what you give up to get it o Marginal Analysis Rational people thank at the margin o People respond to incentives How people interact with each other o Trade can make everyone better off o Markets are usually a good way to organize economic activity Good at maximizing productivity Not fairly distributed equity fairness o Governments can sometimes improve economic outcomes Principle 1 People Face Tradeoffs To get one thing we usually have to give up another thing Guns v butter Food v clothing Leisure time v work Efficiency v equity Efficiency v Equity Efficiency means society gets the most that it can from its scarce resources Equity means the benefits of those resources are distributed fairly among the members of society Principle 2 The cost of something is what you give up to get it Decisions require comparing costs and benefits of alternatives Whether to go to college or to work Whether to study or go out on a date Whether to go to class or sleep in The opportunity cost of an item is what you give up to obtain the item Principle 3 Rational People Think at the Margin Marginal changes are small incremental adjustments to an existing plan of action The decision to choose one alternative over another occurs when the alternative s marginal benefits exceed its marginal costs Principle 5 Trade can make everyone better off People gain from their ability to trade with one another Trade allows people to specialize in what they do best Principle 6 Markets are usually a good way to organize economic activity A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services o Households decide what to buy and who to work for o Firms decide who to hire and what to produce Principle 7 Government Can Sometimes Improve Market outcomes Market failure occurs when the market fails to allocate resources efficiently When the market fails breaks down government can intervene to promote efficiency and equity Market failure may be caused by o An externality which is the impact of one person or firm s actions on the well being of a bystander o Market power which is the ability of a single person or firm to unduly influence market prices