Comprehensive Microeconomics Principles and Economic Methodology

Foundations and Definition of Economics

  • Scarcity and the Fundamental Economic Problem:

    • All economic questions arise because human wants exceed the resources available to satisfy them.
    • Scarcity is the inability to satisfy all our wants.
    • Facing scarcity forces individuals, businesses, governments, and societies to make choices.
    • Choices depend on incentives.
    • An incentive is defined as a reward that encourages an action or a penalty that discourages an action.

  • Formal Definition of Economics:

    • Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.
    • Economics is divided into two main branches:
    • Microeconomics
    • Macroeconomics

Branches of Economics

  • Microeconomics:

    • Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.
    • Key microeconomic questions include:
    • Why are people streaming more movies?
    • Would a tax on online shopping affect Amazon?

  • Macroeconomics:

    • Macroeconomics is the study of the performance of the national and global economies.
    • Key macroeconomic questions include:
    • Why does the unemployment rate fluctuate?
    • Can the Federal Reserve make the unemployment rate fall by keeping interest rates low?

Scope of Economics: Production and Income

  • Core Questions Summarizing Economic Scope:

    • How do choices end up determining what, how, and for whom goods and services get produced?
    • Do choices made in the pursuit of self-interest also promote the social interest?

  • How Goods and Services Get Produced:

    • Goods and services are produced using productive resources called factors of production.
    • Factors of production are categorized into four groups:
    • Land: The "gifts of nature" that are used to produce goods and services.
    • Labor: The work time and work effort that people devote to producing goods and services.
      • Human Capital: The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.
    • Capital: The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services.
    • Entrepreneurship: The human resource that organizes land, labor, and capital.

  • For Whom Goods and Services Are Produced:

    • Who receives goods and services depends directly on the incomes that people earn.
    • Income earned by each factor of production:
    • Land earns rent.
    • Labor earns wages.
    • Capital earns interest.
    • Entrepreneurship earns profit.

The Economic Way of Thinking

  • Six Key Defining Ideas:

    • A choice is a tradeoff.
    • People make rational choices by comparing benefits and costs.
    • Benefit is what you gain from something.
    • Cost is what you must give up to get something.
    • Most choices are "how-much" choices made at the margin.
    • Choices respond to incentives.

  • Opportunity Cost:

    • The opportunity cost of something is the highest-valued alternative that must be given up to get it.
    • Example: The opportunity cost of attending a live concert consists of two distinct components:
    1. The things that cannot be afforded if the concert ticket is purchased.
    2. The things that cannot be done with time if attending the concert.

  • Decision Making at the Margin:

    • Evaluating decisions at the margin involves allocating incremental units of time or resources (for example, choosing how many minutes of the next hour to spend studying versus instant messaging friends).
    • Marginal decision making involves evaluating the consequences of making incremental changes in the use of time or resources.
    • Marginal Benefit: The benefit obtained from pursuing an incremental increase in an activity.
    • Marginal Cost: The opportunity cost of pursuing an incremental increase in an activity.
    • Rational Choice Decision Rule: If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, the rational choice is to do more of that activity.

Scientific Methodology and Related Information

  • Categorization of Statements in Economics:

    • Positive Statements: Statements that can be tested by checking them against facts.
    • Normative Statements: Statements that express an opinion and cannot be tested.

  • General Knowledge Context - Duke University:

    • Established: 1924 in Durham, North Carolina.
    • Role: A leading global institution for education, research, and patient care.
    • Homepage: https://duke.edu/