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First Principles of Microeconomics- Introductory chapter
This document contains notes from the Chapter 1 of this book. The note has a section for key words.
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MicroeconomicsChapter 1 – First principles
Principles that Underlie Individual Choice: The Core of Economics
KEY TERMS
Individual choices Resource Scarce Opportunity cost
Trade-off Marginal decision Marginal analysis Incentive
Interactions Trade Gain from trade Specialization
Equilibrium Efficient Equity
Individual choice – decision by an individual of what to do, which necessarily involves a
decision of what no to do.
The Principles of individual choice:
1. People must make choices 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 bit less.
4. People usually respond to incentives, exploiting opportunities to make themselves
better off.
Principle 1 – Choices are necessary because resources are scarce
Resource – Anything that can be used to produce smth else
Resources are scarce - not enough of the resources are available to satisfy all the various
ways a society wants to use them.
As individuals make choices a society as a whole has to make choices.
Some decisions that a society decides are best not left to individual choice.
Principle 2 - The opportunity cost of an item (what you must give up in
order to get it) is its true cost.
The real cost of an item is its Opportunity cost – what you must give up in order to get it.
All costs are opportunity cost.
Principle 3 – “How much” is a decision at the Margin
Some decisions involve an “either-or” choice.
Trade off - when you compare the costs with the benefits of doing something.
Marginal decision – Decision about whether to do a bit more or a bit less of an activity.
“How much” decisions require making trade-offs at the margin: comparing the costs and
benefits of doing a little but more of an activity versus doing a little bit less
Study of such decisions is known as marginal analysis.
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