Study sheet: Microeconomics Basic Concepts

📋 Course Outline

1. Economy and Economics
2. Scope of Economics
3. Economic Problem and Choice
4. Opportunity Cost
5. Economics as Science and Art
6. Positive and Normative Economics
7. Historical Definitions of Economics
8. Mankiw’s Economic Principles

📖 1. Economy and Economics

🔑 Key Concepts & Definitions

• Economy : A system through which people obtain a living and satisfy their wants through production, exchange, and distribution.
• Economics : The study of how scarce resources are allocated to satisfy human wants.

📝 Essential Points

• Economic activities include:
  • production
  • consumption
  • distribution
  • exchange
  • public finance
  • debt
  • budget presentation

💡 Memory Hook

Scarce resources → choices → satisfaction of wants

📖 2. Scope of Economics

🔑 Key Concepts & Definitions

• Consumption : The process of destroying utility while analyzing consumer demand and behavior to obtain maximum satisfaction.
• Production : The creation of utility and the study of short-run and long-run production functions and producer resource allocation for maximum profit.
• Microeconomics : The economic activities and behavior of small units such as individual consumers, producers, firms, households, and industries.
• Macroeconomics : The performance, structure, behavior, and decision-making of an economy as a whole, including national income, consumption, savings, investment, employment, prices, expenditure, and aggregate supply.

📝 Essential Points

• Traditional economics also studies exchange through buying, selling, and price determination in perfect competition, monopoly, monopolistic competition, oligopoly, and duopoly.

💡 Memory Hook

Microeconomics studies units; macroeconomics studies the economy as a whole

📖 3. Economic Problem and Choice

🔑 Key Concepts & Definitions

• Economic Problem : The problem of choosing how to satisfy unlimited wants with limited resources that have alternative uses.

★ Must-know

• The causes of the economic problem are:

  • scarcity of resources
  • alternative uses of resources
  • unlimited human wants

• Every economy must decide what to produce and in what quantity, how to produce it, and for whom to produce it.

Further detail

• Resources are scarce and have alternative uses, while human wants are unlimited and differ in priority.

💡 Memory Hook

Unlimited wants → scarce resources → alternative uses → choice

📖 4. Opportunity Cost

🔑 Key Concepts & Definitions

• Opportunity Cost : The cost of the next-best alternative forgone when a choice is made.

📝 Essential Points

• If X works in a bank for Rs 40000 per month and rejects offers of Rs 30000 as an executive and Rs 35000 as a journalist, the opportunity cost of the bank job is Rs 35000 per month.

💡 Memory Hook

Chosen option versus the next-best alternative forgone

📖 5. Economics as Science and Art

📝 Essential Points

📌 Economics is a science because it systematizes and analyzes facts to formulate general principles, and it is an art because it applies those principles.

💡 Memory Hook

Science explains economic facts; art applies economic knowledge

📖 6. Positive and Normative Economics

📝 Essential Points

📌 Positive economics is based on objective data, describes economic issues, explains cause-and-effect relationships, and asks what actually is.

📌 Normative economics is based on opinions and values, is subjective, and recommends solutions by asking what ought to be.

💡 Memory Hook

Positive asks what is; normative asks what ought to be

📖 7. Historical Definitions of Economics

🔑 Key Concepts & Definitions

• Wealth Definition : Adam Smith defined economics in Wealth of Nations (1776) as an inquiry into the nature and causes of the wealth of nations.
• Welfare Definition : Principles of economics, 1890 — Alfred Marshall defined economics as the study of people’s actions in the ordinary business of life, including how they earn and use income, with emphasis on material welfare.
• Scarcity Definition : An Essay on the Nature and Significance of Economic Science, 1932 — Lionel Robbins defined economics as the social science studying human behavior as a relationship between unlimited ends and scarce means having alternative uses.
• Growth Definition : Paul A Samuelson — Paul A. Samuelson defined economics as the study of how society chooses to employ scarce resources with alternative uses to produce and distribute commodities over time for present and future consumption.

📝 Essential Points

• Samuelson’s three questions are:
  • what commodities and quantities to produce
  • how to produce them with available technology
  • how total output is divided among society’s members

💡 Memory Hook

Smith: wealth → Marshall: welfare → Robbins: scarcity → Samuelson: growth

📖 8. Mankiw’s Economic Principles

🔑 Key Concepts & Definitions

• Trade-off : The choice required because scarcity prevents people from having everything simultaneously.

📝 Essential Points

• Principles concerning individual decisions are (Professor Gregory Mankiw): people face trade-offs, the cost of something is what you give up to get it, rational people think at the margin, people respond to incentives

• Principles concerning interaction are (Professor Gregory Mankiw): trade can make everyone better off, markets are usually a good way to organize economic activity, government can sometimes improve market outcomes

• Economy-wide principles are (Professor Gregory Mankiw): a country’s standard of living depends on its productivity, prices rise when the government prints too much money, society faces a short-run trade-off between inflation and unemployment

💡 Memory Hook

Decisions → interactions → economy-wide outcomes

📊 Synthesis Tables

Definitions of Economics

Definition	Main focus	Associated thinker
Wealth	Nature and causes of national wealth	Adam Smith
Welfare	Material welfare and ordinary business of life	Alfred Marshall
Scarcity	Unlimited ends and scarce means with alternative uses	Lionel Robbins
Growth	Dynamic allocation and distribution over time	Paul A. Samuelson