Principles of

Microeconomi
cs Reference
Nicholson and Snyder
Intermediate Microeconomics and it's
Applications
 Microeconomics

● The study of the economic choices individuals

and firms make and of how these choices
create markets.
● It stresses that there are not enough basic
resources to satisfy everything people want.
(This leads to choice)
● Microeconomics is the study of all of these
choices and of how well the resulting market
outcomes meet basic human needs.
 Models

● All economists build simplified models of

various activities that they wish to study.
● These simplified models are used to describe
the basic features in the market in general.
● Models are simple theoretical descriptions that
capture essentials of how the economy works.
 Production Possibility Frontier

● A graph showing all possible combinations of

goods that can be produced with a fixed
amount of resources.
● In other words, this graph shows the various
amounts of two goods that an economy can
produce during some give time period.
 Basic Principles

● Resources are scarce

● Scarcity involves opportunity cost
● Opportunity costs are increasing
● Incentives matter
● Inefficiency involves real costs
● Whether markets work well is important
 Opportunity cost

● The cost of a good as measured by the

alternative uses that are foregone by
producing it
 Increasing opportunity cost

● Increasing the output of one good will usually

involve increasing opportunity costs as
diminishing returns sets in
● The opportunity cost of an economic action is
not constant but varies with the circumstances
 Incentives

● When people make economic decisions, they

will consider the opportunity cost
● Only when the extra (marginal) benefits from
an action exceed marginal (extra) opportunity
costs will they take the action being
considered
 Inefficiency

● The economy will producing inside the

production possibility frontier
● There are real losses which involves real
opportunity costs
● Avoiding such costs will make people better
off
 How markets work

● Most economic transactions occur through

markets
● When markets perform poorly, they can
impose real costs on the economy – that is,
they can cause the economy to operate inside
it's PPF
 Supply-demand model

● A model describing how a good's price is

determined by the behaviour of the individuals
who buy the good and of the firms that sell it
● Marshall showed how the forces of demand
and supply simultaneously determine price
 Demand

● Shows the amount of the good people want to

buy at each price
● Negative slope shows that people pay less
and less for the last unit purchased
(they will buy more only at a lower price)
● In other words, downward slope of the
demand curve reflects decreasing marginal
value
 Supply

● Shows the increasing cost of making one

more unit of the good as the total amount
produced increases
● The upward slope of the supply curve reflects
increasing marginal costs
 Equilibrium price

● The price at which the quantity demanded by

buyers of a good is equal to the quantity
supplied by sellers of the good
● The quantity that people are want to purchase
is equal to the quantity that suppliers are
willing to produce
 Positive – Normative Distinction

● Distinction between theories that seek to

explain the world as it is and theories
postulate the way the world should be
● Primarily we take positive approach by using
economic models to explain real-world events