Principles of Economics: Microeconomics

• Economics is a social science studying the production, distribution, and consumption of goods and services.
• It analyzes choices made by individuals, businesses, governments, and societies in allocating scarce resources to satisfy wants and needs.
• Economics is divided into microeconomics and macroeconomics.

Microeconomics

• Microeconomics is the the study of the behavior of individual economic agents like households, firms, and markets.
• It focuses on how these agents make decisions based on changes in prices, incentives, and resource allocation.
• Key concepts are supply and demand, market equilibrium, consumer, and firm behavior.

Supply and Demand

• Supply refers to the quantity of a good or service producers will offer at different prices during a period.
• Demand refers to the quantity of a good or service consumers will purchase at different prices during a period.
• The law of supply states that the quantity supplied increases as price increases, all else being equal.
• The law of demand states that the quantity demanded decreases as price increases, all else being equal.
• Market equilibrium is achieved when quantity supplied equals quantity demanded, establishing an equilibrium price and quantity.

Consumer Behavior

• Consumer behavior explores how individuals make purchasing decisions considering preferences, budget constraints, and prices.
• Utility measures satisfaction or happiness from consuming goods and services.
• Consumers aim to maximize their utility within their budget constraints.
• Income, tastes, and the prices of other goods impact consumer choices.

Firm Behavior

• Firm behavior studies how businesses make decisions about production, costs, and pricing.
• Firms maximize profits, the difference between total revenue and total costs.
• Production functions show the relationship between inputs (labor, capital) and outputs.
• Cost curves illustrate how a firm's costs change with its output level.
• Market structures like perfect competition, monopoly, and oligopoly influence firm behavior and market outcomes.

Macroeconomics

• Macroeconomics studies the economy's behavior as a whole, focusing on GDP, inflation, and unemployment.
• It analyzes factors determining economic growth, business cycles, and government policies.
• Key concepts include GDP, inflation, unemployment, monetary policy, and fiscal policy.

Gross Domestic Product (GDP)

• GDP represents the total value of all final goods and services produced within a country during a period.
• It gauges a country's economic output and indicates its overall economic health.
• GDP can be calculated via the expenditure, income, or production approach.
• Real GDP is adjusted for inflation, providing a more accurate view of economic growth.

Inflation

• Inflation is the rate at which the general level of prices for goods and services is rising, decreasing purchasing power
• Inflation is measured using indices like the Consumer Price Index (CPI) or the GDP deflator.
• High inflation diminishes purchasing power, distorts economic decisions, and causes uncertainty.
• Central banks often deploy monetary policy to manage inflation.

Unemployment

• Unemployment is the situation where individuals are willing and able to work are unable to find employment
• The unemployment rate is the percentage of the labor force that is unemployed.
• Unemployment is caused by cyclical downturns, structural changes, and frictional factors.
• High unemployment causes social and economic hardship.

Monetary Policy

• Monetary policy is when a central bank manipulates the money supply and credit conditions to stimulate or restrain economic activity
• Central banks use interest rate adjustments, reserve requirements, and open market operations to influence inflation and output
• Expansionary monetary policy increases aggregate demand and stimulates economic growth
• Contractionary monetary policy decreases aggregate demand and control inflation

Fiscal Policy

• Fiscal policy involves the use of government spending and taxation to influence the economy
• Governments use fiscal stimulus to increase aggregate demand during recessions, or cut spending and raise taxes to reduce inflation
• Fiscal policy impacts short-term and long-term economy
• Government debt and deficits are important considerations in fiscal policy decision-making

Economic Systems

• An economic system describes how a society organizes the production, distribution, and consumption of goods and services
• Economic systems include market economies, command economies, and mixed economies

Market Economies

• Market economies rely on decentralized decision-making by individuals and firms to allocate resources
• Prices are determined by supply and demand, and markets coordinate economic activity
• Private property rights are protected, and individuals have the freedom to pursue their own economic interests
• Examples include the United States and Japan

Command Economies

• Command economies feature centralized decision-making by the government
• The government controls the means of production, sets prices, and sets production targets
• Individual economic freedom is limited, and resources are allocated according to government priorities
• Examples include North Korea and Cuba

Mixed Economies

• Mixed economies combine elements of both market and command economies
• The government regulates markets, provides public goods and services, and redistributes income
• Most modern economies are mixed economies
• Examples include France and Sweden

International Economics

• International economics studies the economic interactions between countries
• It examines trade patterns, exchange rates, and international financial flows
• Key concepts include comparative advantage, trade barriers, and foreign exchange markets

Comparative Advantage

• Comparative advantage means a country can produce a good/service at a lower opportunity cost than another country
• Countries benefit from specializing in producing goods/services in which they have a comparative advantage and trading with other countries
• Trade leads to countries to consume beyond their production possibilities

Trade Barriers

• Governments impose trade barriers, such as tariffs and quotas, to protect domestic industries from foreign competition
• Tariffs are taxes on imported goods, while quotas are limits on the quantity of goods that can be imported
• Trade barriers reduce the benefits of trade and increase prices for consumers

Foreign Exchange Markets

• Currencies are traded in foreign exchange markets
• Exchange rates determine the relative value of currencies
• Exchange rates are influenced by interest rates, inflation, and economic growth
• Exchange rate fluctuations affect international trade and investment

Economic Development

• Economic development occurs when a country improves its people's economic, political, and social well-being
• It requires sustained economic growth, poverty reduction, and improvements in education, health, and governance
• Investing in human capital, promoting technological innovation, and implementing institutional reforms promote economic development