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Unformatted text preview: 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. ← 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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