DO NOT COPY Surviva+ Guide Principles of Microeconomics EC02023 Prof. joab Corey Exam Study Guide Economics: the study of how we make choices under scarcity • Scarcity: The concept that there is less of a good freely available in nature than we would like Scarcity necessitates rationing Rationing: the allocation of scarce goods to those who want them Scarcity leads to competitive behavior • Resources: an input used to produce an economic good 1. Human Resources (Human capital) 2. Physical Resources (Physical capital) 3. Natural Resources • The Economic way of thinking 1. Resources are scarce so decision makers must make tradeoffs o Opportunity Cost: the highest valued alternative that is and must be sacrificed when making a decision 2. Individuals are rational: they try to get the most from their limited resources 3. Incentives matter: choice is influenced in a predictable way by changing incentives 4. Individuals make decisions at the margin o Marginal: describes the effect of a change in a current situation 5. Information helps us make better decisions, but information is costly 6. Beware of secondary effects: economic actions generate both direct and indirect effects 7. The value of a good or service is subjective: worth different amounts to different people 8. The test of a theory is its ability to predict • Positive vs. Normative Economics -Positive: The scientific study or what is (testable) -Normative: Judgments about what ought to be (not testable) • 4 Pitfalls to avoid in Economic Thinking 1. Violation of the Ceterus Paribus principle -Ceterus Paribus: All other things constant 2. The belief that good intentions guarantee desirable outcomes 1 -Nirvana Fallacy: The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative. 3. The belief that association is causation -Just because two things happen together, they do not cause each otherDO NOT COPY Surviva+ Guide 2 4. Fallacy of composition: the fallacious belief that what is the true for one is true for all Ex. Standing at a football game • Microeconomics vs. Macroeconomics -Microeconomics: focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms (trees) -Macroeconomics: focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor (forest) Voluntary trade vs. Coerced trade -Coercion: Someone will devote resources to make you worse off if you do not comply -Voluntary: you fully agree to make the trade at the agreed terms • Because the value of goods is subjective, voluntary trade creates value 1. When individuals engage in a voluntary exchange, both parties are made better off 2. By channeling goods and resources to those who value the most, trade creates value and increases the wealth created by a society's resources • How trade leads to Economic Progress 1. Gains from specialization and division of labor 2. Gains from mass production methods 3. Gains from innovation • Creation of Wealth: The process by which some people become rich will make everybody richer • Transaction Costs: The time, effort and other resources needed to search out and complete on exchange o Middleman: A person who sells and buys goods or sources or arranges trades and reduces transaction costs • Importance of Property Rights -Property rights include 1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property • 4 Incentives of Private Property Rights: . 1. ·Incentive to use resources in ways that are considered beneficial to others 2. Private owners also have an incentive to care for and manage what they own 3. Private owners have an incentive to conserve for the future 4. Private owners have an incentive to make sure their property does not damage your property • Production Possibilities Curve: outlines all possible combinations of total output that could be produced assuming-1. A fixed amount of productive
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