Principles of Microeconomics
Status
Reading
Author
Dr. Jose J. Vasquez
Publishing/Release
Date
Publisher
Link
https://life-economics.mylearnworlds.com/course?
courseid=econ102uiuc
Summary
Score /5
Type
Textbook
Five Basic Principles
Five Basic Principles
The Economic Problem
Modern economics is based on a few major principles. Master these principles
and you not only go a long way to understand everything that comes afterward in
this course, but also be a much better decision maker in your daily life.
But before you learn these principles you must understand when to apply them;
namely the scope of modern economics.
What is the Main Economic Problem?
All resources are scarce. This truth drives modern economics, and limits the
scope of study to the following question:
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What is the best way for society to distribute a scarce
resource?
Three important conclusions follow from this simply question statement. First, the
“what” refers to some kind of distributional scheme. For instance, the capitalist
system is a distributional scheme that relies heavily on the idea of free markets to
distribute scarce resources among members of society. The socialist system, on
the other hand, is a distributional scheme that relies heavily on a central entity
(e.g. the government), to distribute scarce resources.
Second, the word “best” refers specifically to a situation where society uses all its
resources in their most efficient way. Economist have a pretty straightforward
way of operationalizing this situation:
❕
A situation if efficient when it is impossible to change it without
reducing the net benefits associate with it.
Finally, a scarce resource is any resource that exist in a limited quantity. As it
turns out, this definition of scarcity encapsulates pretty much anything we can
think of; from concrete goods such as coal and clean air to more abstract ones
such as ideas, time and even romantic relationships. Yes, unless you think you
could start a romantic relationship with the first person you see walking along the
street without even doing any effort, then good romantic partners are also a
scarce resource, and hence we can apply economics to it.
Nothing exist in infinite quantity. Therefore, economics would have something to
say about pretty much anything you can think of.
The Nothing is Free (Opportunity Cost) Principle
Since no resources exist in unlimited quantity, using any amount of any resource
mean giving something up. Think about the time you are taking to read this
sentence; oopss; it is now gone. Or the time you are taking to read this new
sentence…yeah, that is now gone too. And, by the time you are done reading
this complete section of the book you probably have given up 10-15 minutes you
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could have used to do something else, like reading a book for another one of
your courses, or spending time with your friends. Every action any other
economic agent take carries a trade off given taht resources are always in limited
quantity. Economists call this trade off an opportunity cost.
The opportunity cost of any economic action or good or
service is the net value of the best alternative.
so from now every time we mention the word “cost” in this course we are really
taking about an opportunity cost. For example, part of the cost of eating a burger
for lunch, is the value you would have received from eating your next best
alternative, a slice of pizza. And part of the cost of attending college is the salary
you could be earning in your best job opportunity. It is going to take some time,
and much practice, for you to start thinking of all costs as the opportunity lost.
But, once you do, you will have an edge over non-economists in terms of
decision making.
The Net Marginal Benefit Principle
Since economics deal with the way people make decision, we are forced to make
some basic assumptions about the way people make decisions. The simplest
assumption we can make about people’s choices is the following:
❕
A rational economic agent (say a person or a firm), will take an action
if, and only if, that ONE action increases net marginal benefits for
that economic agent.
This assumption has two major implications. First, when we evaluate economic
actions, we only consider the consequence of that single action. Economists
called this the marginal change of that action.
Second, no rational economic agent will take an action if the marginal costs of
that action outweigh the marginal benefits of that action. If they did, then the net
marginal benefits will decrease.
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Notice that one problem of using averages to make decisions is that they include
events that already took place and you have no way of changing. Economists call
this type of events sunk costs. For instance, suppose you purchase a brand new
tractor to improve the efficiency of your farm. Can you increase the price of the
corn you sell in order to pay for the large investment costs of purchasing the new
tractor? Of course you can not! If you did no buyer will buy corn from you, since
they could probably buy it from your next door farmer; after all, corn is usually the
same no matter where you buy it. Unfortunately for you, the money you spent
buying the tractor is gone and you can’t get back, so no point in considering it
when deciding what to do about the next bushel of corn you sell.
The net marginal principle will take you some time to master. In the meantime,
just try to remember the following two rules when making a decision about what
to do:
❕
1. never make decisions based solely on AVERAGES.
2. never make decisions based on things that have already taken
place, and hence
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