HS

Econ1101 Chapter 1 Fall 2024 - Spring 2025

Chapter Overview

  • Principles of Microeconomics

  • Course Duration: Fall 2024 - Spring 2025

  • Course Code: ECON1101

Why Study Economics?

Scarcity

  • Definition of Scarcity: The limited nature of society’s resources.

  • Implication: Society cannot produce all goods and services that people desire due to limited resources.

  • Economics: A field that addresses how to manage the allocation of these scarce resources.

Branches of Economics

Microeconomics

  • Focus: How households and firms make decisions.

  • Interactions: Examines how these decisions interact within markets.

Macroeconomics

  • Focus: Study of economy-wide phenomena, including:

  • Inflation

  • Unemployment

  • Economic growth

Ten Principles of Economics

How People Make Decisions

  1. People Face Trade Offs: Choosing one option often means giving up another.

  2. Efficiency vs. Equality: Ensuring that resources are used efficiently while assessing the fair distribution of economic benefits.

  3. Opportunity Cost: The value of the next best alternative that must be forgone to pursue the chosen option.

  4. Rational People Think at the Margin: Decision-making involves small incremental adjustments rather than all-or-nothing choices.

  5. People Respond to Incentives: Changes in costs or benefits influence individual behavior.

How People Interact

  1. Trade Can Make Everyone Better Off: Voluntary trade allows participants to specialize and enjoy a greater variety of goods.

  2. Markets Organize Economic Activity: Market economies coordinate economic activities through the price mechanism.

  3. Government Role: Government can intervene to improve market outcomes in the case of:

    • Market failures

    • Externalities: Costs or benefits incurred by third parties not involved in a transaction.

    • Market power: The ability of a firm to influence prices.

How the Economy Works as a Whole

  1. Standard of Living: A country’s ability to produce goods and services determines its standard of living.

  2. Productivity: Key driver of economic growth and higher living standards.

  3. Inflation and Money Supply: Prices tend to rise if the government prints too much money.

  4. Short-Run Trade-off: In the short run, there may be a trade-off between inflation and unemployment.

  5. Business Cycle: Refers to fluctuations in economic activity such as production and unemployment.