Principles of microeconomics_Chapter 1 Notes by shibbirahmad2013

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									BRAC University, Department of Economics & Social Sciences
ECO 101: Principles of Microeconomics
Chapter 1: First Principles                                                THN, Fall 2010


A combination of topics from Chapters 1, and 2 of the textbook is introduced here:

   • What is economics and why is it relevant?

   • Microeconomics vs. macroeconomics

   • Scarcity, trade-off, marginal analysis, and production possibilities frontier


The World of the Econobot:

Economics is the study of the choices people make to attain their goals, given their scarce
resources. Everything we study in this course will depend on the following central (or core)
assumptions:

   • Individuals are rational, decisions are made independent of any emotional or psycho-
     logical motivations..

   • Resources are scarce, but, needs are unlimited.

   • The real cost of something is more than just the monetary price paid.

   • Everything is determined at the margin.

   • Choices are made till all available opportunities to gain are exhausted.

   • There is always a trade-off between using our limited resources to try to satisfy our
     unlimited needs and wants. As they say, you gain some and lose some.

The above defines the world of the econobot and in this course, we will be dealing with such
econobots in most cases.

Micro vs. Macro: Microeconomics is the study of how individual households or individual
firms make choices, how they interact in markets. Macroeconomics, on the other hand, is
the study of the economy as a whole, including topics such as inflation, unemployment, and
economic growth. For example, whether you choose to buy a new iPod Nano or an iPhone
4G is an example of a microeconomic decision. And, what percentage of Bangladesh’s pop-
ulation is currently unemployed is studied under macroeconomics.

Types of Economies: An economy in which the government decides how resources will
be allocated is called a centrally planned economy. An economy in which the decisions of

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households and firms interacting in markets allocate economic resources is called a market
economy. An economy in which most economic decisions result from the interaction of buyers
and sellers in markets but in which the government plays a significant role in the allocation
of resources is known as a mixed economy.

From Individuals to Markets: Under the assumptions stated above, individuals will in-
teract in a market economy and society will achieve the best outcome. We have two sides to
this situation: (i) the households or the demand side; and (ii) the firms or the supply side.
The circular flow diagram is a way to show the links or interactions between the two.

Markets and Efficiency: Society’s resources are used such that all opportunities are ex-
hausted and no one can be made better off without making someone else worse off.

Equilibrium: A situation where market is in balance. Will look at more detail when cov-
ering demand, supply and the market.




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