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Micro Notes Chapter 1

The document discusses core economic principles including scarcity, opportunity cost, and cost-benefit analysis. It explains that economics is the study of how people make choices with limited resources and the results of those choices. Key concepts covered are rational decision making, economic surplus, and microeconomics vs macroeconomics.

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D Ho
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28 views

Micro Notes Chapter 1

The document discusses core economic principles including scarcity, opportunity cost, and cost-benefit analysis. It explains that economics is the study of how people make choices with limited resources and the results of those choices. Key concepts covered are rational decision making, economic surplus, and microeconomics vs macroeconomics.

Uploaded by

D Ho
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 1

Thinking as an economist

Core principles:
- Scarcity principle
- Cost-benefit principle
- Not all costs are equal principle

1.1 Economics: The study of choice in a world of scarcity


- Economics – the study of how people make choices under conditions of scarcity and of
the results of those choices for society.
- Economic decision – any decision where securing something of value means going
without some other thing of value.
- Scarcity principle (no-free-lunch principle) – although we have boundless needs and
wants, the resources available to us are limited. Consequently, having more of one good
thing usually means having less of another. Trade-offs.
Ø Land, labour capital (manmade, e.g. plant and equipment), enterprise are scarce.
- Cost-benefit principle – an individual should take an action if, and only if, the extra
benefits from taking the actions are at least as great as the extra costs. Extra
cost=marginal cost Two key ingredient in an economic decision.
Ø Implicit cost – hidden, but it’s there.
Ø Explicit cost – what you actually (physically) have to pay.
- Economists use the cost-benefit principle as an abstract model of how an idealized
rational individual would choose among competing alternatives.
- Not-all-costs-and-benefits-are-equal principle – opportunity cost is most important,
followed by marginal cost. These two matter in making decisions where as sunk cost and
average cost don’t.
- Abstract model – a simplified description that captures the essential elements of a
situation
Ø It allows logical analysis.
Ø Ignores the unimportant forces.
- Ceteris paribus – “all else equal”. The assumption that everything that could affect a
variable of interest, other than the thing being studied, stays the same.

1.2 Learning to think as an economist


- Assume that people are rational.
- Economic naturalist – someone who uses basic economic concepts to make sense of
observations about all aspects of everyday life.
- Economic surplus – the gain that results from taking an action when the benefits
outweigh the costs.
Ø The goal of rational economic decision makers is to maximize their economic
surplus.
- Opportunity cost – the value of the next-best alternative to taking a particular action.

1.3 Four important decision pitfalls


- Measure costs and benefits as absolute dollar amounts rather than as proportions.
- Account for all opportunity costs. We tend to overlook the implicit value of activities
that fail to happen.
- Ignore sunk costs. Sunk costs are that that cannot be recovered at the moment a
decision is made.
- Know when to use average costs and benefits and when to use marginal costs and
benefits.
Ø Marginal cost – the increase in costs associated with a small increase in the level of
some activity.
Ø Marginal benefit – the increase in benefits associated with a small increase in the
level of some activity.
Ø Average benefit – the total benefit of undertaking n units of an activity divided by n.

1.5 Microeconomics and macroeconomics


- Microeconomics – the study of individual consumer, firm and market behaviour.
- Macroeconomics – the study of the aggregate economy.

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