ECON1010 (Lec 01) - 10 principles of microecon

10 principles of microecon

Meaning of the Word Economy

• Economy in Greek: “one who manages a household”

The Similarity Between a Household and an Economy

• Make Decisions
  • Limited resources vs. unlimited wants

Society and Scarce Resources

• Scarcity: Society has limited resources → cannot produce all goods & services people wish to have (even billionaires face this)

What Is Economics

• The study of how society manages its scarce resources

Principle 1: People Face Tradeoffs

• Principle of Scarcity / There Ain’t No Such Thing as a Free Lunch / People Face Tradeoffs
  • TANSTAAFL (There Ain’t No Such Thing As A Free Lunch)
  • Things appearing free always have some cost paid by somebody, and nothing in life is truly free
  • In order to produce, you must give in resources → either you or the other pay the price
  • To get one thing, we have to give up another
  • Making decisions requires trading off one goal against another
• Efficiency vs. Equality
  • Efficiency: Society gets the most it can from its scarce resources
  • Equality: Benefits of those resources are distributed fairly among the members of society

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

• The opportunity cost of something = what you give up from other decisions to gain from this decision
• Decisions: Compare costs & benefits of options

Principle 3: Rational People Think at the Margin

• Marginal changes: small, incremental adjustments to an existing plan of action
• People make decisions by considering the marginal costs and benefits → make informed choices & maximize utility or outcome
• E.g., comparing a diamond to water
  • If you are in a normal situation: 1 more diamond > 1 more liter of water → diamond in this situation can bring more marginal benefits
  • If in the Sahara desert: 1 more liter of water > 1 more diamond → marginal cost is that water can help you stay hydrated and not die in the middle of the desert

Principle 4: People Respond to Incentives

• Marginal changes in costs or benefits motivate people to respond
  • That’s why they usually give a sale off or combo / added up benefits to motivate more sales
• Decision to choose option 1 over another = option 1’s marginal benefits > its marginal costs
• If the government wants to protect the environment, reduce carbon footprint
  • Reduce taxes for electric vehicles
  • More taxes / higher prices for private vehicles, lower prices for public vehicles
  • Build an elevated railway to promote traveling in mass to save energy

Principle 5: Trade Can Make Everyone Better Off

• People gain when they trade → more diversified products / resources to make products
• Gains in trading → competition → motivate people to improve their products to enhance their lợi thế (advantage)
• Trade allows people to specialize in what they do best, gain from the specialization of others, and collectively build products that are seemingly incapable of if utilizing their own resources only

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

• Market economy: Economy allocates resources through the decentralized decisions of firms and households (everyone holds the power to alter the economy) as they interact in the market for goods and services
  • Households decide what to buy, who to work for
  • Firms decide who to hire, what to produce
• Economy in Vietnam
  • Socialist-oriented market economy (current): supply and demand determined by price (market economy with a socialist view)
  • Before 1986, no market = bao cap = what to produce is determined by central command econ, gov order
• ”Invisible Hand”
  • Households and firms look at prices → decide what to buy and sell → guide them to reach outcomes that maximize the welfare of them or of society as a whole

Principle 7: Governments Can Sometimes Improve Market Outcomes

• Market failure: when the market fails to allocate resources efficiently
  • Government can intervene to promote efficiency and equity
  • Caused by externality: impact of one person/firm’s action on the well-being of a bystander
  • Market power: ability of one person/firm to influence market prices

Principle 8: The Standard of Living Depends on a Country’s Production

• Standard of living measured by:
  • Comparing personal incomes
  • Comparing the total market value of a nation’s production (OCED)
• Almost all variations in living standards are explained by differences in countries’ productivities
  • Productivity: amount of goods and services produced from each hour of a worker’s time
• Productivity is the ultimate source of living standards

Principle 9: Prices Rise Too Much When the Government Prints Too Much Money

• Inflation: increase in the overall level of prices in the economy
• Cause: growth in the quantity of money
• When the government creates a large quantity of money → value of money falls

Principle 10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment

• Phillips Curve
• Raise interest rate → save up & less loan borrowing → people buying less → company’s products have less demand → increase in unemployment ⇒ slowing the economy
• Money growth is the ultimate source of inflation