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Scarcity and Trade-Offs in Microeconomics

Microeconomics is the study of how individuals and firms make decisions to maximize their well-being with scarce resources. It examines the key trade-offs a society faces in determining what and how goods are produced and who receives them. Economists use simplified models to make testable predictions about relationships between variables and how changes in one variable impact others. These microeconomic models are useful tools for individuals, governments, and firms in informing their decision-making.

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Janny Xu
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50 views1 page

Scarcity and Trade-Offs in Microeconomics

Microeconomics is the study of how individuals and firms make decisions to maximize their well-being with scarce resources. It examines the key trade-offs a society faces in determining what and how goods are produced and who receives them. Economists use simplified models to make testable predictions about relationships between variables and how changes in one variable impact others. These microeconomic models are useful tools for individuals, governments, and firms in informing their decision-making.

Uploaded by

Janny Xu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Chapter 1: Introduction

Microeconomics: Study of how individuals and firms make themselves as well off as possible in
a world of scarcity, and the consequences of those individual decisions for market and the entire
economy.
*microeconomics is often called price theory due to the important role that price plays
ins determining market outcomes.
1. Microeconomics: the study of the allocation of scarce resources.
2. Models: Economists use models to make testable predictions.
3. Uses of Microeconomic Models: Individuals, governments, and firms use
microeconomic models and predictions in decision making.
1.1 Microeconomics: The Allocation of Scarce Resources
Trade-Offs: People make trade-offs because they cant have everything. A society faces three
key trade-offs:
1. Which goods and services to produce
2. How to produce
3. Who gets the goods and services
- US government make the decisions on these three allocations
- Prices influence the decisions of individual consumers and firms, and the
interactions of these decisions by consumers, firm and government determine the price.
Market: an exchange mechanism that allows buyers to trade with sellers.
Twinkie tax: taxes on unhealthful fatty and sugary food.
1.2 Models
Model: a description of the relationship between two or more variables that help predict how
change in one variable will affect another variable.
Simplification by Assumption: an economic model is a simplification of reality that contains
only realitys most important features. Without simplifications its too difficult to predict since
the real world is too complex to analyze fully.
Positive: a testable hypothesis about matter of fact such as cause and effect relationship. To test
whether a statement is true.
Normative: should would could statment that cannot be tested because a value
judgement.
1.3 Use of Microeconomic Models
- Microeconomics models help economist make predictions. It can be very useful
for individuals, governments, and firms.

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