Principles of Microeconomics

Athanasios Kampas
Professor
Dept. Agricultural Economics & Rural
Development
Agricultural University of Athens
GREECE
Rohtak
 TEN PRINCIPLES OF ECONOMICS

• LEARNING OBJECTIVES:

• By the end of this chapter, students should understand:

• How people make decisions

• that economics is about the allocation of scarce resources.

• that individuals face trade-offs.

•
• the meaning of opportunity cost.
• .
TEN PRINCIPLES OF ECONOMICS

LEARNING OBJECTIVES (continued):

How people interact

how incentives affect people’s behavior.

why trade among people or nations can be good for everyone.

why markets are a good, but not perfect, way to allocate resources.

How economy as whole works

what determines some trends in the overall economy
What is (micro)-economics?

Οικονομία-οικονόμος- housekeeping-housekeeper

Fundamental economic dilemma

Scarcity Anthropocentric
concept

Scarcity # deficit
Scale: Micro / Macro

Aggregation Bias: what is good for one,

is not necessarily good for each and every one

1-1 How People Make Decisions

Principle 1: People Face Trade-offs

“There is no such thing as a free lunch.” Making decisions

requires trading one goal for another.

Time management/ spending priorities

Efficiency # Equality
 1-1 How People Make Decisions

Principle 2: The Cost of Something Is What You Give Up to Get It

Making decisions requires individuals to

consider the benefits and costs of some
action

What is the cost of being here? What you sacrifice

Opportunity cost
 1-1 How People Make Decisions

Principle 3: Rational People Think at the Margin

Rational agents What is rationality?

MB>=MC

Marginal : last unit How to hire another employee?

 1-1 How People Make Decisions

Principle 4: People Respond to Incentives

incentive: something that induces a person to act

Altruism
Policy design - Low incentives? Think about Recycling
Blood
donation?

Financial/ social/psychological
1-2 How People Interact

Principle 5: Trade Can Make Everyone Better Off

Specialization/ division of labour

 1-2 How People Interact
Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity

What is market?
Place?

Transaction?
market economy: an economy that
allocates resources through the
decentralized decisions of many firms and Institutional mechanism?
households as they interact in markets for
goods and services.

Maximum welfare
BUT
Markets may fail

1. Non competitive structure (monopolies/oligopolies)

2. Asymmetric information
3. Public goods
4. Externalities

Government Intervention/ Role of the State

But governments may also fail

 1-2 How People Interact

Principle 7: Governments Can Sometimes

Improve Market Outcomes

Market power: antitrust policies/laws

1-3 How the Economy as a Whole
Works
Principle 8: A Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services

The explanation for differences in living standards lies in differences

in productivity.

Definition of productivity: the quantity of goods and services produced

from each hour of a worker’s time

Technology, R&D, Institutional factors, democracy, rule of law, etc

1-3 How the Economy as a
Whole Works
Principle 9: Prices Rise When the Government
Prints Too Much Money

Inflation : an increase in the overall level of prices in the economy.

1-3 How the Economy as a
Whole Works
Principle 10: Society Faces a Short-Run Trade-off
between Inflation and Unemployment
 Common property Private Goods
resources
rivalry

Public Goods Club goods

excludability
Is education a public good?