Basic Microeconomics principles of Microeconomics Seven Principles of Microeconomics Life is a series of tradeoffs o Everyone faces choices in life. The fact that we have choices, means that the study of economics exists. The definition of economics is how one decides to allocate their scarce resources. E.g. Guns vs. Butter (national defense vs. consumer goods) A Government must decide whether to focus spending on consumer goods or national defense. Whereas investment in consumer goods leads to economic growth and can lead to prosperity, national defense ensures security and safety of a country's citizens. The cost of something is what you give up to get it o Opportunity cost The opportunity cost is the benefit given up in the next best option foregone. E.g. If x has a job that pays $10 an hour, but gives up their 5 hour shift in order to have a movie/dinner night with friends...the opportunity cost of this action is the $50 they could have earned at their job. Rational people think at the margin o rational people will only act if the marginal benefit outweighs the marginal cost. E.g. if a person is buying apples, they will only continue to buy one more apple if they think that having one more apple is really worth paying the price of an extra apple. People respond to incentives o Incentives are provided in to order sway a person to do one thing over another. Ex. Europeans are heavily taxed on gasoline, therefore they drive small cars, this cuts down on pollution emissions o Important for people who design public policy Trade can make everyone better off o Fundamental idea: You have something that will make me better off, I have something that will make you better off o Expanding the boundary of trade helps keep prices under control, import prices vs. export prices. o The idea of competitive advantage, if one country is efficient at producing cars, while the other is efficient at producing computers, they will exert their production capacity on their specializations and then trade said products. Markets are usually a good way to organize economic activity o Prices are determined by the forces of demand/supply o Market is always driven towards equilibrium, which is the most efficient price for all parties involved
o Conflicting interests of consumers and producers, mean that a reasonable outcome for transactions is generally discovered. Government can sometimes improve market outcomes o Externality: when something is created that has an effect beyond the consumer Ex. Air pollution carried from plant carried into a community, Government intervention (usually in the form of a tax) tries to promote fairness.