Microeconomics Ch. 1

11 Principals of Economics

What are the four principals that guide Individual choices? (1,2,3,4)

1. Choices Are Necessary Because Resources Are Scarce

2. The opportunity cost of an item — what you must give up in order to get it — is its true cost.

3. “How much” decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. (Marginal analysis)

4. People respond to incentives, exploiting opportunities to make themselves better off.

What are the 4 principals of Interaction? (5,6,7,8)

1. There are gains from trade.

2. Markets move toward equilibrium.

3. Resources should be used efficiently to achieve society’s goals.

4. Markets usually lead to efficiency, but when they don’t, government intervention can improve society’s welfare.

What are the 3 principles of Economy wide interactions? (9,10,11)

1. One person’s spending is another person’s income.

2. Overall spending sometimes gets out of line with the economy’s productive capacity; when it does, government policy can change spending. 

3. Increases in the economy’s potential lead to economic growth over time.

What is the opportunity cost?

What you must give up in order to get an item you want— is the opportunity cost of the item you want

What is marginal analysis?

The study of marginal decisions (Trade-offs at the margin)

Many economic decisions involve questions of “how much” — how much to spend on some good, how much to produce, and so on. How must these decisions be made?

By performing a trade-off at the margin — by comparing the costs and benefits of doing a bit more or a bit less. Decisions of this type are called marginal decisions

Why must people make choices?

Resources are scarce.

What is meant by “Individuals usually respond to incentives”

They’re exploiting opportunities to make themselves better off

What is the study of interaction?

How my choices depend on your choices, and vice versa

Why do individuals interact? 

Because there are gains from trade—by engaging in the trade of goods and services with one another, the members of an economy can all be made better off

What is the economic significance of specialisation?

Each person specialises in the task they are good at which is the source of gains from trade

Define Market Equilibrium

A situation in which no individual can make themselves better off by taking a different action

When is an economy efficient?

When all opportunities to make some people better off without making other people worse off are taken. Resources should be used as efficiently as possible to achieve society’s goals.

Describe the relationship between efficiency and equity.

There is often a trade off between equity and efficiency in economy because the most efficient possibility is rarely the most equitable  

What happens when markets fail and do not achieve efficiency?

Government intervention can improve society’s welfare.

Which principle of individual choice is illustrated: You are on your third trip to a restaurant's all-you-can-eat dessert buffet and are feeling very full. Although it would cost you no additional money, you forgo a slice of coconut cream pie but have a slice of chocolate cake.

Concept of opportunity cost (2)

Which principle of individual choice is illustrated:   Different teaching assistants teach several Economics 101 tutorials.

Those taught by the teaching assistants with the best reputations fill up quickly, with spaces left unfilled in the ones taught by assistants with poor reputations.

People respond to incentives (4) + it also illustrates concept that resources are scarce (1)

Which principle of individual choice is illustrated: To decide how many hours per week to exercise, you compare the health benefits of one more hour of exercise to the effect on your grades of one less hour spent studying.

Illustrates marginal analysis— “How much” decisions (3)

Which of the principles of interaction is illustrated: At a college tutoring co-op, students can arrange to provide tutoring in subjects they are good in (like economics) in return for receiving tutoring in subjects they struggle with (like philosophy).

There are gains from trade (5)

Which of the principles of interaction is illustrated: The local municipality imposes a law that requires bars and nightclubs near residential areas to keep their noise levels below a certain threshold.

When markets don’t achieve efficiency, government can intervene to improve society’s welfare (8)

Which of the principles of interaction is illustrated: To provide better care for low-income patients, the local municipality has decided to close some under utilised neighbourhood clinics and shift funds to the main hospital.

Resources are scare and should be used as efficiently as possible to achieve society’s goals.  (7)

Which of the three principles of economy-wide interactions is illustrated: The price of solar panels has fallen by nearly 99% over the past 40 years.

Prices are projected to continue falling over the next 30 years.

Increases in economy’s potential lead to economic growth over time (11)

Which of the three principles of economy-wide interactions is illustrated: The financial crisis of 2008 caused unemployment to soar. In response, the Prime Minister urged Parliament to pass a package of temporary spending increases and tax cuts in early 2009.

Overall spending sometimes gets out of line with the economy’s productive capacity; when it does, government policy can change spending. (10)

Which of the three principles of economy-wide interactions is illustrated:  During 2020, as the COVID-19 pandemic raged, people drove less.

Gasoline companies responded by sharply cutting production of gasoline.

In cities in oil-producing jurisdictions like Alberta, Alaska, and Texas, restaurants and other consumer businesses experienced significant reductions in their sales.

One person’s spending is another person’s income. (9)