Notesale: Turn your study into money

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Principles of Microeconomics

Econ 1200

Chapter 1
Scarcity-society has limited resources and cannot produce the goods and services people wish
to have at all times
Economics-the study of how society manages its scarce resources
-to understand how people make decisions (how much they work, what they buy, how much
they save and so forth)
-buyers and sellers determine the price and quantity of goods sold

10 principles of economics
1
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” Opportunity costs exist
everywhere such as deciding how to manage time
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Trade-off society faces between efficiency and equality in deciding economic policies
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Equality-the property of distributing economic prosperity uniformly among the
members of society
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The cost of something is what you give up to get it: Trade-offs is about comparing the
costs and benefits of alternative courses of action
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An opportunity cost is whatever must be given up to obtain some item
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Rational people think at the margin: Rational people-those who systematically and
purposefully do the best they can to achieve their objectives
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Marginal change-a small incremental
adjustment to a plan of action
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“Why water is cheap while diamonds
are expensive” is because the marginal benefit is greater for something that is rare
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People respond to incentives: An incentive is something that induces a person to act
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Example: Car seat belt law encourages reckless driving since
people believe seat belts prevent crashing
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Trade can make everyone better off: Not necessarily a competition between countries
producing the same goods
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This is because trade allows specialization
of skills in different countries which reduces the cost of production
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Markets are usually a good way to organize economic activity: Most countries have
adopted a market economy which allocates resources through the decentralized
decisions of many firms and households as they interact in markets
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Prices determine economic activity

as buyers look at how much to demand and sellers look at how much to supply from the
dollar value
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Governments can sometimes improve market outcomes: Government enforces the
rules and maintains the institutions that are key to a market economy
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Institutions enforce property rights-the ability of an individual to own and
exercise control over scarce resources
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(Example: pollution, 2nd hand smoke) Market power is the ability of a single
economic actor or group of actors to have a substantial influence on market prices
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A country’s standard of living depends on its ability to produce goods and services:
Average income differences in rich and poor countries determine quality of life
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Example: The rise of living standards in America
is attributed to rising productivity because of greater amount of goods and services
resulting from the collective labor force
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Prices rise when the government prints too much money: This is called inflation which is
an increase in the overall level of prices in the economy
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The value of money falls because there
is more money in circulation or a higher quantity
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Society faces a short-run trade-off between inflation and unemployment: Increasing the
amount of money in the economy stimulates overall spending
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More people are hired for production lowering unemployment
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Example: Housing market crash, falling incomes, reducing
taxes all affect this cycle

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