Basic Microeconomics - Lecture Notes

Economics: Origin and Definition

  • Economics from the Greek word 'oikonomos' meaning "one who manages a household"

    Explanation: Economics originates from the Greek word 'oikonomos', which translates to "one who manages a household".

  • study of how society manages its limited resources

    Explanation: It is fundamentally the study of how society allocates and manages its finite, or limited, resources to satisfy unlimited wants and needs.

Micro vs Macro

  • Microeconomics: Individuals, households, firms; specific product or labor markets; Supply & demand; cost structures

    Explanation: Microeconomics studies the economic behavior of individuals, households, and firms. It focuses on specific markets for products and labor, examining concepts like supply and demand and cost structures.

    An example of microeconomics is when a local coffee shop decides to increase the price of its lattes because the cost of coffee beans has gone up. This decision affects that specific business and its customers in the latte market.

  • Macroeconomics: Governments, nations, global economies; National income accounts; monetary/fiscal policy

    Macroeconomics focuses on the economic behavior and performance of an entire economy, including governments, nations, and global economies. It deals with broad economic phenomena such as national income accounts, and the application of monetary and fiscal policies to influence economic growth, inflation, and unemployment.

    An example of macroeconomics is when the government decides to lower interest rates to stimulate spending and investment across the entire country during an economic downturn. This policy aims to boost the national economy rather than affecting a single market or business.

  • What to produce? How much? At what price? (Micro focus)

    An example of this is a single fruit stand deciding whether to sell apples or oranges, how many of each to order, and what price to charge per fruit.

  • How fast is the economy growing? Inflation? (Macro focus)

    An example of this is when the national government announces that the overall average price of goods and services for the country has increased by 3% in a year, indicating inflation.

Importance of Microeconomics

  • Understanding of individual and business decisions

  • Efficient allocation of resources

  • Basis for economic policy

Ten Principles of Economics

How People Make Decisions

  • 1. People face trade-offs

  • 2. The cost of something is what you give up to get it

  • 3. Rational people think at the margin

  • 4. People respond to incentives

How People Interact

  • 5. Trade can make everyone better off

  • 6. Markets are usually a good way to organize economic activity

  • 7. Governments can sometimes improve market outcomes

How the Economy as a Whole Works

  • 8. A country’s standard of living depends on its ability to produce goods and services

  • 9. Prices rise when the government prints too much money

  1. Society faces a short-run trade-off between inflation and unemployment

Key Takeaways

  • Scarcity forces individuals, organizations, and governments to make decisions.

  • Microeconomic decisions collectively influence macroeconomic trends.

  • Microeconomics helps us understand and predict behavior, design better policies, and make informed choices in everyday life.