Principles of Microeconomics: Lecture 1 - Course 701020

This document presents an introductory lecture on the principles of microeconomics. It begins by defining economics and its core concepts, including scarcity and the allocation of resources. The lecture then explores the production possibility frontier, illustrating the various combinations of output an economy can produce efficiently. It differentiates between microeconomics and macroeconomics, positive and normative economics, and explains the benefits of trade and specialization. The document delves into ten key principles of economics, covering decision-making, incentives, market dynamics, and the role of government. It emphasizes how individuals and societies make choices in the face of scarcity, the importance of opportunity cost, and how markets can organize economic activity. The lecture concludes with a summary of the main points, reinforcing the importance of understanding economic principles for informed decision-making and understanding the world around us. This resource is available on Desklib, a platform offering study tools for students.

INTRODUCTION TO ECONOMICS
PRINCIPLES OF MICROECONOMICS
Lecture 1
Prepared by: Minh Huynh, PhD
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Objectives
2
● 1.1. Explain what economics is about.
● 1.2. Construct and interpret the Production
Possibility Frontier Curve.
● 1.3. Distinguish between Microeconomics and
Macroeconomics; Positive economics & Normative
economics.
● 1.4. Explain why trade makes everyone better off .

Contents
Definition of Economics
1
The Production Possibility Frontier2
Microeconomics and Macroeconomics3
Positive Economics & Normative Economics4
1
3
Interdependence and the Gains from Trade5

● Economics is the study of how individuals and
societies use/allocate limited resources to satisfy
unlimited wants.
● The production possibility frontier is a graph
showing the various combinations of output that
the economy can possibly produce when all
resources are being utilized in the most efficient
manner, given the current level of technology.
4

● Economics is divided into two subfields:
- Microeconomists study decision making by
households and firms in the marketplace.
- Macroeconomists study the forces and trends
that affect the economy as a whole.
5

● A positive statement is an assertion about how
the world is.
● A normative statement is an assertion about how
the world ought to be.
● When economists make normative statements,
they are acting more as policy advisors than
scientists.
6

SUMMARY
● Interdependence and trade allow everyone to
enjoy a greater quantity and variety of goods &
services.
● Comparative advantage means being able to
produce a good at a lower opportunity cost.
Absolute advantage means being able to produce a
good with fewer inputs.
● Trade makes everyone better off because it
allows people to specialize in those activities in
which they have a comparative advantage.
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Introduction to Economics
1
1.1 Ten principles of economics
1.2. Think like an economist

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1.1. TEN PRINCIPLES OF ECONOMICS
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• Scarcity: limited social resource nature.
• Economics: the study of how
societies
manage scarce resources. For example:
– How do people decide what to buy, work, save and
how much to spend?
– How does the enterprise decide how much
production, how many workers are hired?
– How does society decide to divide resources between
defense, consumer goods, environmental protection
and other needs?
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HOW PEOPLE MAKE
DECISIONS
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HOW PEOPLE MAKE DECISIONS
• Attending a dinner party before the mid-term
exam will have less time spent studying.
• To have more money to buy things you love will
have to work harder and less rest time.
• Protecting the environment requires resources
that cannot be used to produce consumer goods.
Principle # 1: Every decision involves trade-
offs
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• Making a decision requires comparing the costs
and benefits of the alternatives.
• The opportunity cost of something is something
you have to give up to get it.
• These are the costs involved in making a
decision.
Principle # 2: The cost of something is what
you give up to get it.
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• Example: The opportunity cost of…
– … Going to college for a year is not just tuition,
textbooks and fees but also missed wages.
– … Watching a movie is not only the ticket price, but
is also worth the time spent in the cinema.
Principle # 2: The cost of something is what
you give up to get it.
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• Reasonable people
– Systematic, purposeful do the best they can to
achieve their goals.
– Make a decision by assessing the costs and
benefits of marginal change.
Principle # 3: A rational person thinks at the
margin
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• When a student considers going to college for
another year, he compares the cost to the
income he can earn in one year.
• When a manager considers an increase in output,
she compares the labor costs and the materials
needed to get the extra revenue.
Principle # 3: A rational person thinks at the
edge
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• For example:
– When gasoline prices rise, consumers buy more fuel-
efficient cars.
– As the tobacco tax increases, teen smoking declines.
Principle # 4: People respond to incentives
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HOW PEOPLE
INTERACTION
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• Instead of being self-sufficient, people can produce
a particular good or service in order to exchange it
for another.
• Countries also benefit from trade and
specialization:
– Get a better price overseas for your own goods.
– Buy other goods at a cheaper price from abroad than
made domestically.
Principle # 5: Trade can benefit everyone
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• Market: a group of buyers and sellers
• "Organizing economic activity" means
deciding
– What goods are produced?
– How to produce them?
– How much are they produced?
– Who are the buyers?
Principle # 6: The market is often a good way to
organize economic activity
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• The market economy allocates resources through
the decentralized decisions of businesses and
households during market interactions.
• Adam Smith's Insights in The Wealth of Nations
(1776): Each household and business acts as if "led
by the invisible hand" to promote economic well-
being.
Principle # 6: The market is often a good way
to organize economic activity
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• The invisible hand works through the price system:
• The invisible hand works through the price system:
– The interaction between buyer and seller determines the price.
– Each price reflects the value of the good to the buyer and the
cost of producing it.
– Price drives the interest of households and businesses to make
decisions, in many cases maximizing social and economic well-
being.
The market economy allocates resources through the decentralized
decisions of businesses and households during market interactions.
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• The key role of government: enforcing property
rights (police, courts)
• People are less inclined to work, produce, invest
or buy when there is a great risk of their
property being stolen.
Principle # 7: Government can sometimes
improve market outcome
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• Market failure: when the market itself fails to effectively allocate
resources.
• Reason:
– External effects , when the production and consumption of a
good is affected by an outsider. (
example: pollution)
– Market power , a single seller or a single buyer has a significant
effect on market prices (
e.g. monopoly )
• In some cases, public policy can improve efficiency.
Market failure: when the market itself fails
to effectively allocate resources.
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• Government can alter market results to promote
equity.
• If the allocation of economic welfare is not as
expected, tax and welfare policies can change
the way the economic “pie” is divided.
Principle # 7: Government can sometimes
improve market outcome
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1.1.3. HOW DOES THE
ECONOMY WORK?
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• Disparities in living standards between
countries and over time:
– Average income in rich countries is 10 times higher
than average income in poor countries.
– The average income of the US today is eight times
larger than in the previous century.
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Principle # 8: The standard of living in a
country depends on its capacity to produce
goods and services
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• The most important determinant of living standards is
the productivity , the quantity of goods and services a
worker produces.
• Productivity depends on the equipment, skills, and
technology available to workers.
• Other factors (
eg labor unions, foreign competition)
play a minor role in the standard of living.
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Principle # 8 The standard of living in a country depends
on its capacity to produce goods and services
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• Inflation : an increase in the overall price level in
the economy.
• In the long run, inflation is almost always caused
by an overgrowth in the amount of money,
thereby devaluing the currency.
• The faster the government makes money, the
higher the inflation rate.
Principle # 9: Prices rise when the
government prints too much money
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• In the short term (1-2 years), many economic
policies push inflation and unemployment in
opposite directions.
• Other factors may make this trade-off more or
less beneficial, but the trade-off always exists.
Principle # 10: Society faces a short-term
trade-off between inflation an unemployment
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SUMMARY
● Economics is the study of how individuals and
societies use/allocate limited resources to satisfy
unlimited wants.
● The production possibility frontier is a graph
showing the various combinations of output that
the economy can possibly produce when all
resources are being utilized in the most efficient
manner, given the current level of technology.
31

SUMMARY
● Economics is divided into two subfields:
- Microeconomists study decisionmaking by
households and firms in the marketplace.
- Macroeconomists study the forces and trends
that affect the economy as a whole.
32

SUMMARY
● A positive statement is an assertion about how
the world is.
● A normative statement is an assertion about how
the world ought to be.
● When economists make normative statements,
they are acting more as policy advisors than
scientists.
33

SUMMARY
● Interdependence and trade allow everyone to
enjoy a greater quantity and variety of goods &
services.
● Comparative advantage means being able to
produce a good at a lower opportunity cost.
Absolute advantage means being able to produce a
good with fewer inputs.
● Trade makes everyone better off because it
allows people to specialize in those activities in
which they have a comparative advantage.
34

Why do we learn economics?
● 1. To read newspapers
Check out these headlines…

Why do we learn economics?
State proposes price ceiling for milk products(Vietnam News)

Why do we learn economics?
● 2. What else?