Microeconomics
What Economics Is All About
Economics is the study of few things:
● Study of how people use time and material resources to improve their own well-being.
● Study of how those decisions affect others in society.
● Study of policies designed to affect people making economic decisions.
Economics - is a social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity, the incentives that influence
those choices, and the arrangements that coordinate them.
Macroeconomics - The study of the aggregate (or total) effects on the national economy and the
global economy of the choices that individuals, businesses, and governments make.
Scarcity - the limited nature of society’s resources. (Jdo jade resources nhi hunde)
Ten Principles of Economics
(How people make decisions)
1. People face tradeoffs (trade krna)
2. The cost of something is what you give up to get it.
3. People make rational choices and rational people think at the margin.
4. People respond to incentives.
(How people interact)
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Government can sometimes improve market outcomes.
(How the economy works as a whole)
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 tradeoff between inflation and unemployment.
Principle 1 - People face tradeoffs
● Tradeoff - giving up one thing to get something else.
● Society faces an important tradeoff: efficiency vs. equity
● efficiency: getting maximum benefits from scarce resources. (effectively use krna)
● equity: distributing the economic prosperity uniformly among the members of society.
(basically fairness)
, Microeconomics
● To achieve equality, the government redistributes income from the rich to the poor.
(fuddu)
● This reduces the incentive to work hard as a result the size of the economic “pie” gets
smaller.
Principle 2 - The cost of something is what you give up to get it.
● Making decisions requires comparing the costs and benefits of alternative choices.
● The opportunity cost of any item is whatever must be given up to obtain it.
● It is also an important component of the cost for decision-making.
Principle 3: Rational People Think at the margin
● A person is rational if he systematically and purposefully does the best he can to achieve
his objectives.
● Marginal change – a small incremental adjustment to an existing plan.
● Evaluating the costs and benefits of marginal changes is an important part of decision-
making.
● Marginal cost - The opportunity cost that arises from a one-unit increase in an activity.
The marginal cost of something is what you must give up to get one additional unit of it.
● Marginal benefit - The benefit that arises from a one-unit increase in an activity. The
marginal benefit of something is measured by what you are willing to give up to get one
additional unit of it.
Principle 4: People Respond to Incentives
● Incentive: something that induces a person to act, i.e. the prospect of a reward or
punishment.
● Rational people respond to incentives because they make decisions by comparing costs
and benefits.
- In response to higher fuel prices, sales of “hybrid” cars (e.g., Toyota Prius) rise.
- In response to higher cigarette taxes, teen smoking falls.
Principle 5: Trade Can Make Everyone Better off
● Rather than being self-sufficient, people can specialize in producing one good or service
and exchange it for other goods.
● Countries also benefit from trade & specialization:
- get a better price from abroad for the goods they produce
- buy other goods cheaply from abroad than could be produced at home
What Economics Is All About
Economics is the study of few things:
● Study of how people use time and material resources to improve their own well-being.
● Study of how those decisions affect others in society.
● Study of policies designed to affect people making economic decisions.
Economics - is a social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity, the incentives that influence
those choices, and the arrangements that coordinate them.
Macroeconomics - The study of the aggregate (or total) effects on the national economy and the
global economy of the choices that individuals, businesses, and governments make.
Scarcity - the limited nature of society’s resources. (Jdo jade resources nhi hunde)
Ten Principles of Economics
(How people make decisions)
1. People face tradeoffs (trade krna)
2. The cost of something is what you give up to get it.
3. People make rational choices and rational people think at the margin.
4. People respond to incentives.
(How people interact)
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Government can sometimes improve market outcomes.
(How the economy works as a whole)
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 tradeoff between inflation and unemployment.
Principle 1 - People face tradeoffs
● Tradeoff - giving up one thing to get something else.
● Society faces an important tradeoff: efficiency vs. equity
● efficiency: getting maximum benefits from scarce resources. (effectively use krna)
● equity: distributing the economic prosperity uniformly among the members of society.
(basically fairness)
, Microeconomics
● To achieve equality, the government redistributes income from the rich to the poor.
(fuddu)
● This reduces the incentive to work hard as a result the size of the economic “pie” gets
smaller.
Principle 2 - The cost of something is what you give up to get it.
● Making decisions requires comparing the costs and benefits of alternative choices.
● The opportunity cost of any item is whatever must be given up to obtain it.
● It is also an important component of the cost for decision-making.
Principle 3: Rational People Think at the margin
● A person is rational if he systematically and purposefully does the best he can to achieve
his objectives.
● Marginal change – a small incremental adjustment to an existing plan.
● Evaluating the costs and benefits of marginal changes is an important part of decision-
making.
● Marginal cost - The opportunity cost that arises from a one-unit increase in an activity.
The marginal cost of something is what you must give up to get one additional unit of it.
● Marginal benefit - The benefit that arises from a one-unit increase in an activity. The
marginal benefit of something is measured by what you are willing to give up to get one
additional unit of it.
Principle 4: People Respond to Incentives
● Incentive: something that induces a person to act, i.e. the prospect of a reward or
punishment.
● Rational people respond to incentives because they make decisions by comparing costs
and benefits.
- In response to higher fuel prices, sales of “hybrid” cars (e.g., Toyota Prius) rise.
- In response to higher cigarette taxes, teen smoking falls.
Principle 5: Trade Can Make Everyone Better off
● Rather than being self-sufficient, people can specialize in producing one good or service
and exchange it for other goods.
● Countries also benefit from trade & specialization:
- get a better price from abroad for the goods they produce
- buy other goods cheaply from abroad than could be produced at home
