Microeconomic Principles Chapter 1 Lecture Notes PDF
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Jönköping University
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This document is a lecture on microeconomic principles, covering topics such as scarcity, cost-benefit analysis, and the concept of opportunity cost. The lecture explains important concepts and gives examples.
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Microeconomic Principles Chapter 1 1. The Scarcity Principle ”Having more of one good thing usually means having less of another” 2. The Cost-Benefit Principle ”No action takes place unless its marginal benefit is at least as great as its marginal cos...
Microeconomic Principles Chapter 1 1. The Scarcity Principle ”Having more of one good thing usually means having less of another” 2. The Cost-Benefit Principle ”No action takes place unless its marginal benefit is at least as great as its marginal cost” 3. THE INCENTIVE PRINCIPLE Incentives are central to people's choices 4. The principle of unequal costs Marginal Opportunity Sunk Average 5. The Principle of Comparative Advantages ”Everyone does best when each one concentrates on the activity for which he or she is relatively most productive” 6. The Equilibrium Principle ”A market in equilibrium leaves no unexploited opportunities for individuals, but may not exploit all gains achievable through collective actions” 7. The Efficiency Principle ”Efficiency makes the economic pie grow larger” Other important concepts: Ceteris Paribus Rationality If the cost increases from 50 to 100 DECISION PITFALLS Economic analysis predicts likely behavior Four general cases of mistakes 1. Measuring costs and benefits as proportions instead of absolute amounts 2. Ignoring opportunity (implicit) costs 3. Taking sunk costs into account 4. Failure to think at the margin 1. MEASURING COSTS AND BENEFITS AS PROPORTIONS RATHER THAN ABSOLUTE MONEY AMOUNT Example: Should you walk 3km to save €10 on a €1,000 laptop? ECONOMIC SURPLUS The economic surplus of an action is equal to its benefit minus its costs ECONOMIC SURPLUS The economic surplus of an action is equal to its benefit minus its costs Economic surplus = Total Benefits − Total Costs If we get $10 of savings from walking to town, and our costs of walking to town are $9, then the economic surplus from walking to town is $10 − $9 = $1. 2. IGNORING OPPORTUNITY COSTS Example: Should you go to London? Frequent-flyer ticket Otherwise – ticket price €500 Other relevant costs (hotel, food): € 1,000 Reservation price: €1,350 3. FAILURE TO IGNORE SUNK COSTS How much should you eat at an all-you-can-eat restaurant? Cost: €5 at the door 20 randomly selected guests eat for free. 4. FAILURE TO UNDERSTAND THE AVERAGE – MARGINAL DISTINCTION The focus should always be on the benefit and cost of an additional unit of activity. Should you allocate your resources differently to get more coconuts?
