Summary of Microeconomics

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  SUMMARY INTERMEDIATE MICROECONOMICS AND ITS APPLICATION PART 1 INTRODUCTION CHAPTER 1 Economic Models ‘‘Economics  (especially microeconomics) is the study of mankind in the ordinary business of life.’’  Alfred Marshall, Principles of Economics, 1890 Wat is microeconomics? Economics   is formally defined as the ‘‘study of the allocation /use of scarce resources among alternative uses.’’ This definition stresses that there simply are not enough basic resources (such as land, labor, and capital equipment) in the world to produce everything that people want. Microeconomics  is the study of the economic choices individuals and firms make and of how these choices create markets.   Models  are simple theoretical descriptions that capture the essentials of how the economy works. There “ unrealistic ” . A few basic principles Much of microeconomics consists of simply applying a few basic principles to new situations. Production possibility frontier  is a graph showing all possible combinations of (two) goods that an economy can produce with a fixed amount of scarce resources during some period (say, one year). It also shows the opportunity cost  of producing more of one good as the quantity of the other good that cannot then be produced. Any combination on or inside the frontier can be produced, but combinations of products outside the frontier cannot be made because there are not enough resources to do so. Six principles that are common to practically every situation studied in microeconomics:    Resources are scarce.  We simply cannot have all of everything we might want.    Scarcity involves opportunity costs.  That is, producing more of one good necessarily involves producing less of something else.    Opportunity costs are increasing.  Expanding the output of one particular good will usually involve increasing opportunity costs as diminishing returns set in.    Incentives matter.  When people make economic decisions, they will consider opportunity costs. Only when the extra (marginal) benefits from an action exceed the extra (marginal) opportunity costs will they take the action being considered.    Inefficiency involves real costs.  An economy operating inside its production possibility frontier is said to be performing ‘‘inefficiently’’.   When we study why markets might  produce such inefficiencies, it will be important to keep in mind that such losses are not   purely conceptual, being of interest only to economic researchers. These are real losses. They involve real opportunity costs. Avoiding such costs will make people better off.    Whether markets work well is important.  Most economic transactions occur through markets. As we shall see, if markets work well, they can enhance everyone’s well -being. But, when markets perform poorly, they can impose real costs on any economy  —  that is, they can cause the economy to operate inside its production possibility frontier. Uses of Microeconomics Microeconomic principles have been applied to study practically every aspect of human  behavior. One way to categorize the uses of microeconomics is to look at the types of people who use it. At the most basic level, microeconomics has a variety of uses for people in their own lives. An understanding of how markets work can help you make decisions about future jobs, about the wisdom of major purchases (such as houses), or about important financial decisions (such as retirement). Businesses also use the tools of microeconomics. Any firm must try to understand the nature of the demand for its product. A firm that stubbornly continues to produce a good or service that no one wants will soon find itself in bankruptcy.
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