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Introduction to Microeconomics

Introduction to Microeconomics - Introduction to...

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Introduction to Microeconomics 27/08/2007 22:07:00 Chapter 1: First Principles Economics is based on a set of common principles that apply to many different issues Some of these principles involve individual choice o Making choice among a limited number of alternatives To understand the economy you have to understand the individual Individual Choice: decisions by an individual about what and what not to do Resources are scare Limited income, limited supply, limited time Resource: anything that can be used to produce something else Scarce: the quantity of the resource available isn’t large enough to satisfy all productive uses Scarce resources o Natural resources, human resources Society as a whole must make choices due to scarcity Opportunity Cost: what you must forgo un order to get something you want All cots are opportunity costs Sometimes money is a good indication of opportunity cost, other times its not Trade-off: a comparison of costs and benefits Marginal decisions: a decision made at the “margin” of an activity to do a little more or a little less (comparing the costs and benefits) Ask the question “How much” Marginal analysis: They study of such decision stated above.
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People exploit opportunities that better themselves Will continue to exploit opportunities until they have exhausted themselves The principle that people will exploit opportunities to make themselves better off is the basis of all prediction by economists about individual behavior Incentive: A reward offered to people who change their behavior People’s choices are by no means independent of each other: each individual’s opportunities, and hence choices, depend to a large extent on the choices made by other people. Interaction: choices affect choices Results of actions may be very different from what the individual intended. Principles that Underlie the Interaction of Individual Choices 1. There are gains from trade 2. Markets move towards equilibrium 3. Resources soul be used as efficiently as possible to achieve society’s goal 4. Markets usually lead to efficiency 5. When markets don’t achieve efficiency, government interaction can improve society’s welfare. Trade: people divide tasks among themselves and each person proves a good or service that other people want in return for different goods and services he or she wants. Gains of Trade: By dividing task more people can get what they want by being self- sufficient Specialization: different people engage in different tasks, division of tasks The economy as a whole can produce more when each person specializes in a task and trades with others.
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