Introduction to Microeconomics – Lecture 1

Flashcards covering the main concepts, definitions, and examples introduced in Lecture 1 of 14.01 Microeconomics.

What key condition makes decision-making necessary in microeconomics?

Scarcity – limited resources relative to unlimited wants.

In microeconomics, what phrase describes the process of trying to be as well off as possible within limits?

Constrained optimization.

Define ‘opportunity cost’.

The value of the next best alternative that must be forgone when a choice is made.

Why is economics often nicknamed the “dismal science”?

Because it emphasizes that nothing is free—every action involves trade-offs and opportunity costs.

How did John Gruber compare microeconomics to engineering?

Both are about constrained optimization; economics applies the idea to people and firms rather than machines.

Who is considered the father of modern (mathematical) economics and wrote his textbook at MIT?

Paul Samuelson.

Who is regarded as the father of all economics and authored ‘The Wealth of Nations’?

Adam Smith.

What famous example did Adam Smith use to illustrate the difference between value and price?

The water–diamond paradox (water is vital yet cheap; diamonds are frivolous yet expensive).

What does a downward-sloping demand curve represent?

As price rises, the quantity demanded falls.

What does an upward-sloping supply curve represent?

As price rises, the quantity supplied increases.

Define market equilibrium.

The price–quantity pair at which quantity supplied equals quantity demanded, satisfying both buyers and sellers.

What are the three ways students should understand every model in this course?

Intuitively (mom test), graphically, and mathematically.

Differentiate ‘positive’ and ‘normative’ analysis.

Positive analysis explains how things are; normative analysis judges how things should be.

In the eBay kidney example, what was the positive explanation for the high price?

Low supply and very high demand for kidneys.

What key question about the kidney market illustrates normative analysis?

Should people be allowed to buy and sell kidneys?

List three types of market failure mentioned in the lecture.

Fraud/imperfect information, equity (fairness) concerns, and behavioral (irrational decision-making) issues.

Give one equity concern raised about selling kidneys on eBay.

Only the rich might obtain kidneys, leaving poorer patients without access.

What characterizes a capitalistic economy?

Firms and individuals decide what to produce and consume, subject to basic rules set by government.

What characterizes a command economy?

The government determines production and allocation decisions for goods and services.

What is Adam Smith’s ‘invisible hand’ principle?

Individuals pursuing self-interest can unintentionally promote the overall good of society.

According to Gruber, what preliminary criterion will this course use for ‘best for society’?

Producing and consuming the maximum total surplus (most valued stuff).