Basic Microeconomics Lecture Notes

Introduction to Economics

• Economy Origin: From the Greek word "economist" meaning manager of household/society's resources.
• Importance: Managing resources is crucial due to scarcity.
  • Scarcity: Limited resources prevent satisfying all wants.
• Definition:
  • Economics is the study of how society manages its scarce resources.
  • Concerned with production, distribution, and consumption of goods and services.

10 Principles of Economics

Overview

• Divided into three parts:
  1. How people make decisions (Principles 1-4)
  2. How people interact (Principles 5-7)
  3. How the economy works as a whole (Principles 8-10)

Principles 1-4: How People Make Decisions

Principle 1: People Face Trade-offs

• "No free lunch": To get something, you must give up something else.
• Example: Trade-off between efficiency and equity.
  • Efficiency: Maximizing resource use.
  • Equity: Fair distribution of wealth.
  • Government decisions often balance the two.

Principle 2: The Cost of Something is What You Give Up to Get It

• Decisions involve comparing costs and benefits of alternatives.
• Opportunity Cost: The cost of the next best alternative foregone.

Principle 3: Rational People Think at the Margin

• Rational people systematically do their best to achieve objectives.
• Marginal Changes: Small, incremental adjustments to a plan.

Principle 4: People Respond to Incentives

• Incentives motivate individuals to act.

Principles 5-7: How People Interact

Principle 5: Trade Can Make Everyone Better Off

• Trade allows for specialization and can benefit all parties involved.

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

• Market Economy: Allocates resources through decentralized decisions.
• Interaction of firms and households in markets determines economic outcomes.

Principle 7: Governments Can Sometimes Improve Market Outcomes

• Role of Government: Enforce rules and maintain institutions for market function.
• Property Rights: Essential for market operations.
• Market Failure: Situations where markets do not allocate resources efficiently.

Principles 8-10: How the Economy Works as a Whole

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

• Productivity: Key to living standards.
  • More productive workers lead to business growth.

Principle 9: Prices Rise When the Government Prints Too Much Money

• Inflation: Increase in overall price level.
  • Caused by excessive monetary supply.

Principle 10: Society Faces a Short-run Trade-off Between Inflation and Unemployment

• Inflation impacts spending, which affects employment.
  • Short-run trade-offs: Balancing inflation and unemployment.

Conclusion

• Inflation is a critical economic issue; will discuss more in future sessions.