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Macroeconomics Krugman- Chapters 1& 2
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What is Economics?Created Sep 4, 2020 942 AM
Reading Krugman, Chapters 1 & 2
Lecture Notes
Individual Choice
Individual choice: the decision by an individual of what to do, involving the
decioion of what not to do
Principle 1: Choices are necessary because resources are scarce
Has to answer the questions of:
What to produce
How much to produce
For who to produce
Individual decisions help a society in a market economy make decisions
Principle 2: The true cost of something is its opportunity cost
Every choice made means forgoing some alternative
Opportunity cost does not have to be strictly monetary
Money paid for something can be an indication of its opportunity cost
Principle 3: "How much" is a decsion at the margin
The decision in an "either-or" scenario involves a trade-off
Marginal decisions: decisions about whether to do a bit more or less of an
activity
Marginal analysis: the study of "how much" decisions
What is Economics? 1
, Principle 4: People respond to incentives, exploiting opportunities
for self-gain
Individuals will continue to exploit incentives until resources and opportunities are
fully exhausted
Economists tend to be skeptical of any attempt to change behaviour that doesn't
change incentives
Interaction: How Economies Work
Interaction: my choices affect yours, results may be different from what is
intended
Principle 5: There are gains from trade
In a market economy, individuals engage in trade to achieve a better standard of
living.
Trade allows for individuals to get more of what they desire than if they were self-
sufficient.
Specialisation: division of tasks to maximise gains from trade
discussed in Adam Smith's The Wealth of Nations 1776
The economy, as a whole, can produce more when each
person specialises in a task and trades with others.
Principle 6: Market equilibrium
Caused by responses to incentives
Equilibirum: when the incentives have been exhaused
Principle 7: Allocative and resource efficiency
Allocative efficiency: opportunities are distributed to make some people better off
without making others worse
Equity: (aka economic equality) fairness in the sense that there is varying levels of
support to ensure a greater outcome fo fairness
What is Economics? 2
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