Topic 1 Principles of Microeconomics Sunday June 14 2015 4 11 PM Readings Chapter 1 Appendix A What is Economics Economics is a social science as psychology sociology political science etc But the better answer is The study of choices made by agents in the face of scarcity These agents may be people institutions firms governments etc Normative vs Positive Economics Normative What should happen Positive What will happen Economists focus on the POSITIVE statements NOT the normative statements 10 Basic Principles Principle 1 Scarcity and Costs Principle 2 Incentives Scarcity refers to the inability to satisfy all desires because resources are unavailable but finite Scarcity is everywhere Scarcity and costs create incentives which guide people s decisions Incentives are extremely powerful Example Movies Movies are expensive There are two costs Actual dollar paid Time spent in the movie Both of these costs are scarce In this case time is an example of an opportunity cost Opportunity cost is the value of the next best alternative not consumed i e the best alternative of what you could have done with your time You will NEVER get your money s worth Principle 3 Behavior on the Margin People think about whether or not to have one more of something i e You care about the value of an additional unit which we call marginal value Firms also make decisions on the margin Worry about the cost of producing an additional unit the marginal cost and how much they can sell that additional unit for the marginal revenue Principle 4 Efficiency Principle 5 Markets If resources are scarce the next question is how should those resources be allocated to satisfy limitless wants and needs A market is an arrangement that allows buyers and sellers to interact and exchange goods and services The answer is that resources should be allocated efficiently Pareto Efficiency an allocation of resources is efficient if the resources cannot be reallocated to help someone without hurting someone else Prices are key Efficiency is NOT the same as equity Whether an allocation is fair is a normative question Markets solve the economic problem meaning that they allocate resources efficiently when they work correctly Prices act as a signal of what to produce create incentives for some firms to produce and determine who buys the product Principle 6 Government can help or hurt Taxes subsidies quotas and price controls are ways in which governments intervene in markets If markets are functioning efficiently then government interventions tend to mess things up If markets are NOT functioning efficiently then the government may be able to make things better Microeconomics Page 1
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