Principles of Microeconomics (Test 1)

The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

KEY WORDS: coordination
^ coordination refers to how the three central problems facing any economy are solved & the coordination questions faced by society are complicated.

1.) What, and how much, to produce?
2.) How to produce it?
3.) For whom to produce it?

The goods available are too few to satisfy individuals' desires.
There is a PROBLEM of scarcity in our economy.

1.) Our wants.
2.) Our means of fulfilling those wants.

Interrelated since wants are changeable and partially determined by society. The way we fulfill wants can affect those wants.

The degree of scarcity is constantly changing. The quantity of goods, services, and usable resources depends on technology and human action, which underlie production.

Individuals' imagination, innovativeness, and willingness to do what needs to be done.

NO. New wants are constantly being developed.

Coercion. In all known economies, coordination has involved some type of coercion.

Limiting people's wants and increasing the amount of work individuals are willing to do to fulfill those wants.

Inspiring people to do things that other people want them to do, and not to do things that other people don't want them to do.

The study of how to get people to do things they're not wild about doing and not to do things they are wild about doing, so that the things some people want to do are consistent with the things other people want to do.

The study of individual choice, and how that choice is influenced by economic forces.

ex. pricing policies of firms, households' decisions on what to buy, and how markets allocate resources among alternative ends.

The study of the economy as a whole.
Focuses on aggregate relationships such as how household consumption is related to income and how government policies can affect growth.

ex. inflation, unemployment, business cycles, and growth.

Making decisions on the basis of costs and benefits; Based on the premise that everything has a cost.

People do what is in their best interest financially--relying on the cost/benefit analysis.

Every choice has costs and benefits, and decisions are made by comparing them.

The additional cost to you over and above the costs you have already incurred.

Costs that have already been incurred and cannot be recovered.

The additional benefits above what you've already derived.

If the marginal benefits of doing something exceed the marginal costs, do it.
If the marginal costs of doing something exceed the marginal benefits, don't do it.

The benefit that you might have gained from choosing the next-best alternative.
^ to obtain the benefit of something, you must give up something else.

IMPORTANT ROLE: Remind you that the costs relevant to decisions are often different from the measured costs.

Relevance of opportunity cost aren't limited to individual decisions. Relevant to government's decisions, which affect EVERYONE in society.

Costs associated with a decision that often aren't included in normal accounting costs.

Costs that show up in financial accounts but that economists argue should not be considered in a choice because they are already spent.

^ Will not change regardless of what the person making the decision chooses.

Those goods must be rationed.

The necessary reaction to scarcity.

It becomes a market force.

An economic force that is given relatively free rein by society to work through the market.

Changing prices.

^ Shortage = price goes up.
Surplus = price goes down.

The price mechanism, the rise and fall of prices that guide our actions in a market.

(Market works like an invisible had).

1.) Economic forces (the invisible hand).
2.) Social forces.
3.) Political forces.

No, economic forces are always operating.

Can however whether to allow market forces to predominate.

Forces that guide individual actions even though those actions may not be in an individual's selfish interest.

Legal directives that direct individuals' actions.

Social, cultural, and political forces.

Often political and social forces work together against the invisible hand.
Also, often times the strength of social forces are reinforced by political forces.

You cannot understand economics without understanding the limitations that political and social forces place on economic actions.

1.) Economic Forces.
2.) Political and Legal Forces.
3.) Social and Cultural Forces.

Generalizations, called theories, about the workings of an abstract economy as well as on contextual knowledge about the institutional structure of the economy.

A framework that places the generalized insights of the theory in a more specific contextual setting.

A commonly held economic insight stated as a law or principle.

A branch of economics that studies the economy through controlled experiments.

ex. laboratory experiments, field experiments, computer experiments, and natural experiments.

Propositions that are logically true based on the assumptions in a model.

Policy rules that conclude that a particular course of action is preferable.

TRUE

Technology changes.

1.) When the quantity supplied is greater than the quantity demanded, price has a tendency to fall.
2.) When the quantity demanded is greater than the quantity supplied, price has a tendency to rise.

Achieving a goal as cheaply as possible.

A market economy, through the price mechanism, will tend to allocate resources efficiently.

Economists have developed this theory of the markets which say that, under certain conditions, markets are efficient & the market will coordinate individuals' decisions.

You don't know the theory.

Laws, common practices, organizations (corporations, governments, and cultural norms), etc.

Actions (or inaction) taken by government to influence economic actions.

The study of what is, and how the economy works.

Explores pure theory of economics, and discovers agreed-upon empirical regularities, often called empirical facts.

1.) Positive Economics.
2.) Normative Economics.
3.) The Art of Economics.

The study of what the goals of the economy should be.

Developed by Adam Smith; Each person places himself in the position of a third-person examiner and judges a situation from everyone's perspective, not just his own.

"GREATEST GOOD FOR THE GREATEST NUMBER."

FALSE.

The application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics.

AKA Political Economy.

Easiest = Positive.
Hardest = Art of Economics.