Microeconomics PDF

1 First Principles Revised by Vitaly Terekhov Krugman, Economics, 6e, © 2021 2020 Worth Publishers  WHAT YOU WILL LEARN IN THIS CHAPTER What four principles guide the choices made by individuals? What four principles govern how individual c...

1 First Principles Revised by Vitaly Terekhov Krugman, Economics, 6e, © 2021 2020 Worth Publishers  WHAT YOU WILL LEARN IN THIS CHAPTER What four principles guide the choices made by individuals? What four principles govern how individual choices interact? What three principles illustrate economy-wide interactions? Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INDIVIDUAL CHOICE, PART 1 1. Choices are necessary because resources are scarce. Resource: anything that can be used to produce something else. Scarce: a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it. Scarce Resources includes: Minerals Lumber Petroleum Time Human Resources Skill Clean Air Clean Water Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INDIVIDUAL CHOICE, PART 2 2. The true cost of something is its opportunity cost. Opportunity cost: what you must give up in order to get something. Mark Zuckerberg understood the concept of opportunity cost – and dropped out of Harvard. Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INDIVIDUAL CHOICE, PART 3 3. “How much” is a decision at the margin. Trade-off: comparison of the costs and the benefits of doing something. Most decisions don’t have to involve an “either” this “or” that. Suppose you are taking both Biology and Chemistry and you must spend time to study daily, You must choose how many hours you need to spend studying each subject Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INDIVIDUAL CHOICE, PART 4 Marginal decision: a decision made at the margins of an activity about whether to do a bit more or a bit less of that activity. Marginal analysis: the study of marginal decisions. Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INDIVIDUAL CHOICE, PART 5 4. People respond to incentives, exploiting opportunities to make themselves better off. Incentive: anything that offers rewards to people who change their behavior. Which policy would more effectively reduce pollution: educating manufacturers about climate change or offering them financial rewards for reducing pollution? Krugman, Economics, 6e, © 2021 2020 Worth Publishers  LEARN BY DOING: PRACTICE QUESTION 1 Suppose Costco offers unlimited free samples on the weekends and customers respond by eating samples until they are full without buying any of the product. Do the customers that eat the free samples face an opportunity cost? a) Yes b) No Krugman, Economics, 6e, © 2021 2020 Worth Publishers LEARN BY DOING: PRACTICE QUESTION 1 - ANSWER Suppose Costco offers unlimited free samples on the weekends and customers respond by eating samples until they are full without buying any of the product. Do the customers that eat the free samples face an opportunity cost? a) Yes (correct answer) b) No Krugman, Economics, 6e, © 2021 2020 Worth Publishers  LEARN BY DOING: PRACTICE QUESTION 2 Suppose Costco offers unlimited free samples on the weekends and customers respond by eating samples until they are full without buying any of the product. Economists would refer to this as an example of: a) Efficiency b) Equity c) Bad incentives d) Marketing Krugman, Economics, 6e, © 2021 2020 Worth Publishers LEARN BY DOING: PRACTICE QUESTION 2 - ANSWER Suppose Costco offers unlimited free samples on the weekends and customers respond by eating samples until they are full without buying any of the product. Economists would refer to this as an example of: a) Efficiency b) Equity c) Bad incentives (correct answer) d) Marketing Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INTERACTION OF INDIVIDUAL CHOICES, PART 1 5. There are gains from trade. Trade allows us all to consume more than we otherwise could. Gains from trade arise from specialization. Specialization: the situation in which each person specializes in the task that he or she is good at performing. Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INTERACTION OF INDIVIDUAL CHOICES, PART 2 6. Markets move toward equilibrium. Because people respond to incentives, markets move toward equilibrium. Equilibrium: an economic situation in which no individual would be better off doing something different. Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INTERACTION OF INDIVIDUAL CHOICES, PART 3 7. Resources should be used efficiently to achieve society’s goals. Economy is efficient if it takes all opportunities to make some people better off without making other people worse off. Krugman, Economics, 6e, © 2021 2020 Worth Publishers THE PRINCIPLES: INTERACTION OF INDIVIDUAL CHOICES, PART 4 Equity: a condition in which everyone gets his or her “fair share.” (There are many definitions of equity.) EQUITY AND EFFICIENCY ARE OFTEN AT ODDS. 8. Markets usually lead to efficiency, but when they don’t, government intervention can improve society’s welfare. People normally take opportunities to make themselves better off. Efficiency: all the opportunities to make people better off have been exploited. In cases of market failures, the pursuit of self-interest makes society worse off. When markets don’t achieve efficiency, government can intervene to improve society’s welfare. Krugman, Economics, 6e, © 2021 2020 Worth Publishers  LEARN BY DOING: PRACTICE QUESTION 3 In most fast-food chains there is one person to take the order, another to make each item of food, and another to bag the items up. This is referred to as: a) Equilibrium b) Marginal c) Trade-offs d) Specialization Krugman, Economics, 6e, © 2021 2020 Worth Publishers LEARN BY DOING: PRACTICE QUESTION 3 - ANSWER In most fast-food chains there is one person to take the order, another to make each item of food, and another to bag the items up. This is referred to as: a) Equilibrium b) Marginal c) Trade-offs d) Specialization (correct answer) Krugman, Economics, 6e, © 2021 2020 Worth Publishers  LEARN BY DOING: PRACTICE QUESTION 4 A low-skilled worker may work full time and still earn an income that falls below the poverty line. Some economists consider this a failure related to a) Inefficiency b) Inequity Krugman, Economics, 6e, © 2021 2020 Worth Publishers LEARN BY DOING: PRACTICE QUESTION 4 - ANSWER A low-skilled worker may work full time and still earn an income that falls below the poverty line. Some economists consider this a failure related to a) Inefficiency b) Inequity (correct answer) Krugman, Economics, 6e, © 2021 2020 Worth Publishers  THE PRINCIPLES: ECONOMY-WIDE INTERACTIONS, PART 1 9. One person’s spending is another person’s income. During recessions, a drop in business spending leads to: Less income, less spending… …and further drops in business spending, layoffs, and rising unemployment. Krugman, Economics, 6e, © 2021 2020 Worth Publishers  THE PRINCIPLES: ECONOMY-WIDE INTERACTIONS, PART 2 10. Overall spending sometimes gets out of line with the economy’s productive capacity; when it does, government policy can change spending. Overall spending (amount of goods and services that consumers and businesses want to buy) sometimes doesn’t match the amount the economy is capable of producing. When the overall spending falls short of what is needed to keep workers employed, the economy experiences recession. When overall spending outstrips the supply, the economy experiences inflation. When the economy experiences shortfalls or an excesses in spending, government policies can be used to address the imbalances. Krugman, Economics, 6e, © 2021 2020 Worth Publishers  THE PRINCIPLES: ECONOMY-WIDE INTERACTIONS, PART 3 11. Increases in the economy’s potential lead to economic growth over time. Economic growth: the increase in living standards over time. Economy’s potential: the total amount of goods and services it can produce. Emergence of new technologies and increases in resources available for production boost the economy’s potential, hence living standards. Increases in living standards are usually unequally distributed among a country’s residents, creating winners and losers. For example, new sources of energy benefit the economy and the environment – they are winners. But at the same time, the reduced demand for coal has hurt mining communities, creating losers. Krugman, Economics, 6e, © 2021 2020 Worth Publishers LEARN BY DOING DISCUSSION QUESTION 1 Do wealthy people such as Oprah Winfrey and Jeff Bezos face scarcity? Krugman, Economics, 6e, © 2021 2020 Worth Publishers