Microeconomics Study Notes PDF

Microeconomics Study Notes (Introduction) 1. Basics of Economic Sciences Scarcity: ○ Resources (time, goods, abilities) are limited, but desires are unlimited. ○ Economics studies how to make the best choices with these limits. ○ Example: Choosing between bu...

Microeconomics Study Notes (Introduction) 1. Basics of Economic Sciences Scarcity: ○ Resources (time, goods, abilities) are limited, but desires are unlimited. ○ Economics studies how to make the best choices with these limits. ○ Example: Choosing between buying a laptop or a smartphone when you have a limited budget. Microeconomics vs. Macroeconomics: ○ Microeconomics: Focuses on individuals, households, and businesses (e.g., how a company sets prices). ○ Macroeconomics: Focuses on the economy as a whole (e.g., inflation, unemployment). 2. Allocation of Scarce Resources Trade-offs: Making a choice where gaining one thing means giving up another. For example, a company might choose to invest in advanced technology instead of hiring more workers, sacrificing short-term expenses to increase long-term productivity. Key Questions in Economics: These questions help us understand how societies use limited resources efficiently: People make trade-offs because they can’t have everything. A society faces three key trade-offs 1. What to produce? Limited resources mean choosing specific goods or services. 2. How to produce? Firms decide the mix of resources (e.g., labor vs. machines). 3. Who gets what? Allocation depends on income, wealth, or government policies. Market and Prices: ○ Markets connect buyers and sellers. ○ Prices decide who buys and sells (e.g., higher prices discourage buyers). 3. Economic Models Definition: A model is a simplified representation of the real world that shows how variables are related, helping to predict outcomes and understand how changes in one aspect affect another.  Purpose: ○ Predict behavior (e.g., “If prices rise, demand falls”). ○ Test ideas with real-world data. Key Concepts: Those keys are for understanding how economic models work and how economists use them to predict behavior and inform policy decisions. ○ Simplifications: Focus on important details and ignore the rest. ○ Testing Theories: Use data to check if models work. If not, update or reject them. ○ Constraints: People and firms have limits (e.g., money, resources, time). Models focus on how these agents make the best decisions given their constraints. ○ Positive vs. Normative: Positive statements help us understand cause-and-effect relationships, while normative statements guide policy decisions based on values and what should happen in the economy. Positive: Testable facts (e.g., “Raising prices reduces demand”). Normative: Value-based opinions (e.g., “Prices should be low to help the poor”). 4. Microeconomics Overview Definition: The study of how individuals and firms make decisions to get the most benefit in a world of limited resources. Focus on Prices: ○ Prices decide what to produce, how, and for whom. ○ Example: If coffee prices rise, fewer people buy coffee. Market Interactions: ○ Households: Buyers in markets (e.g., groceries) and sellers in labor markets. ○ Firms: Sellers in product markets and buyers of labor/resources. Why Study Microeconomics?: ○ To understand how prices and markets work. ○ To analyze how decisions by individuals and firms affect the economy. In microeconomics, we look at how *demand* (what people want to buy) and *supply* (what businesses are willing to sell) interact to set prices. This system works when buyers and sellers meet in markets, and microeconomics helps explain the forces that shape these prices. Key Exam Focus  Scarcity and how it forces choices. Difference between microeconomics and macroeconomics. The 3 main economic questions (what, how, for whom). Trade-offs and the role of prices in decision-making. Economic models: Simplifications, testing, constraints, and predictions. The difference between positive (facts) and normative (opinions) statements. Real-life examples of markets and price effects. Simple Mnemonic for Study: S.T.A.R.: Scarcity shapes decisions. Trade-offs guide choices. Actions depend on prices. Resources are always limited.