Principle of Microeconomics: Introduction

Posted by GwanSiu on July 21, 2018

1. Introduction

Economics is social science that examines how people choose among the alternative availiable to them, the foundamental issue of which is scarcity. Economics is quasi-science, because it use some assumption to explain economics phenomenon.

Economics can be devided into two area: Microeconomics and Macroeconomics.

  • Microeconomics: Microeconomics focuses on the topics of scarcity based on several budget constraints in the view of individual.
  • Macroeconomics: Macroeconomics focuses on the impact of choices on the total, or aggregate level of economics activity.
  • In fact, individual markets are the research topic in both Microeconomics and Macroeconomics. Microeconomics focuses on the individual in the markets, while Macroeconomics payes attention to the aggregate result or phenomenon caused by choices of individual in the market.

In this series article, I will write down some learning note about Microeconomics when I take the class: 14.01S, Principle of Microeconomics, MIT.

2. 3 Basic Questions of Economics

Due to scarcity, Microeconomics payes attention to individual decision based on budget constraints. Individual includes consumers and producers. It is assumed that consumers are motivated to maximize their untility based on their budgut constraints, and producers maximize their profit based on consumer demand and input costs.

There are 3 basic economics questions we should think about:

  1. What goods and services should be produced?
  2. How to produces goods and services?
  3. Who gets the goods and services?

These 3 questions are linked by price. Price is the signal to guide these 3 questions.

3. Theoretical economics V.S. Empirical economics

  • Theoreticale economics —> build model based on some assumption.
  • Empirical economics —> test the model we build in the theoretical economics.

4. Positive Economics V.S. Normative economics

  • Positive economics is the fact and can be tested: the way think are.
  • Normative economics is value judgments and can not be tested: the way should be.

5. Opportunity Cost

Opportunity cost is the value of the best alternative forgone in making y choice. Opportunity cost reminds us that we should pay more attention to the margin when we make decision, and is highly related to relative advantage and efficient production, which will be shown in the next several lecture notes.

6. Two things should be noticed.

  1. The All-Other-Things-Unchanged problem
  2. The Fallacy of false Cause