SVKM’s NMIMS ASMSOC (NAVI MUMBAI CAMPUS)
Microeconomics for B.Sc (Finance) | Course Code : 42EC0C005
Students Handout / Notes
Session 1 – 21/07/23
The Ten Principles of Economics
The "Ten Principles of Economics" were famously introduced by economist Gregory Mankiw
in his book "Principles of Economics." These principles serve as fundamental concepts that
guide the understanding of economics. Here they are:
1. People face trade-offs:
• Choices are inevitable due to limited resources and competing needs.
• Examples: Allocating time between studying and leisure, spending money on
goods or saving for the future.
2. The cost of something is what you give up to get it:
• Opportunity cost - the value of the next best alternative foregone.
• Considered in decision making; making choices involves weighing benefits
and costs.
• Example: Choosing to attend a party instead of studying may result in a lower
grade on an exam.
3. Rational people think at the margin:
• People compare additional benefits and costs when making decisions.
• Decisions are not based on total costs or benefits, but on incremental changes.
• Example: A business deciding whether to produce one more unit based on
marginal revenue and marginal cost.
4. People respond to incentives:
• Incentives influence behaviour, either positively or negatively.
• Understanding incentives helps predict how people will react to changes in
circumstances.
• Example: Offering discounts on products to boost sales or implementing fines
for speeding to deter reckless driving.
5. Trade can make everyone better off:
• Specialization allows individuals and countries to focus on producing goods
or services in which they have a comparative advantage.
• Trade benefits all parties involved by increasing total output and variety of
goods.
• Example: A country exporting its agricultural produce to another country in
exchange for machinery.
6. Markets are usually a good way to organize economic activity:
• Competitive markets allocate resources efficiently based on supply and
demand.
• Prices adjust to balance the quantity supplied and demanded.
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Example: The stock market, where prices reflect investor perceptions of
company values.
Governments can sometimes improve market outcomes:
• Market failures may occur due to externalities or lack of competition.
• Government intervention can correct these failures and enhance economic
efficiency.
• Example: Implementing environmental regulations to reduce pollution.
A country's standard of living depends on its ability to produce goods and services:
• Economic productivity determines a nation's prosperity.
• Technological advancements and education play a crucial role in increasing
productivity.
• Example: Countries investing in research and development to enhance
productivity.
Prices rise when the government prints too much money:
• Inflation results from an increase in the money supply exceeding the growth
of goods and services.
• Hyperinflation can lead to reduced purchasing power and economic
instability.
• Example: Printing excessive money to finance government spending can lead
to inflation.
Society faces a short-run trade-off between inflation and unemployment:
• Known as the Phillips Curve, it suggests a negative relationship between
inflation and unemployment in the short term.
• Policymakers need to find a balance between controlling inflation and reducing
unemployment.
• Example: Implementing expansionary monetary policy to reduce
unemployment may lead to higher inflation.
The Economic Problem: Scarcity and Choice
1. The Economic Problem:
• Scarcity: Resources are limited, and human wants are unlimited.
• Scarcity leads to the need to make choices and trade-offs in allocating
resources.
• No society can produce all the goods and services that its people desire.
2. Scarcity and Choice:
• Limited Resources: Examples include land, labor, capital, and
entrepreneurship.
• Unlimited Wants: Human desires for goods and services are virtually
insatiable.
• Necessity of Choice: Due to scarcity, individuals and societies must decide
which goods and services to produce and consume.
3. The Three Basic Questions of an Economy:
• What to Produce: Choosing the combination of goods and services to produce
based on consumer demands and societal needs.
• How to Produce: Deciding on the most efficient methods and technologies for
production.
• For Whom to Produce: Determining how the produced goods and services are
distributed among the members of society.
4. Opportunity Cost:
• Definition: The value of the next best alternative that must be given up when a
choice is made.
• Example: If you have $20 and decide to spend it on a movie ticket, the
opportunity cost is the value of the next best option, such as buying a book or
having dinner.
5. Production Possibility Curve (PPC):
• Definition: A graphical representation of the trade-offs between two goods that
an economy can produce with limited resources.
• Points on the curve represent maximum efficiency, while points inside the
curve indicate inefficiency.
• Example: If an economy is producing X quantity of butter and Y quantity of
guns at point A on the PPC, it can produce more of butter and less of gun
without sacrificing the overall efficiency by moving to points like B, C and D
on the curve.
Figure 1a: Standard PPF:
increasing opportunity cost
Figure 1b: Straight line PPF:
constant opportunity cost
Figure 1c: inverted PPF:
decreasing opportunity cost
6. Microeconomics and Macroeconomics:
• Microeconomics: Focuses on individual economic agents such as consumers,
firms, and industries and their interactions in specific markets.
• Macroeconomics: Examines the economy as a whole, including factors like
inflation, unemployment, and economic growth.
7. Importance of Understanding Scarcity and Choice:
• Informed Decision-Making: Understanding scarcity helps individuals and
governments make rational choices.
• Resource Allocation: Efficient resource allocation is essential for economic
growth and societal welfare.
• Economic Systems: Different economic systems address the economic problem
in diverse ways (market economy, command economy, mixed economy).
Remember, comprehending the economic problem of scarcity and choice is crucial as it forms
the foundation for further exploration of economic principles and decision-making in various
economic situations.