Econ 101 Principles of Microeconomics Economics is the study of choice under conditions of scarcity. As individuals we have limited time and spending power. As individuals and societies we are faced with limited resources and virtually unlimited wants. Economists study the choices we make and also the consequences of these choices.

Scarcity and Social Choice Goals of society: »High standards of living for our citizens »Clean air »Low crime rates »Good healthcare Scarcity of Resources Economists classify resources into four categories »Labour »Capital – Physical, Human »Land/ Natural Resources »Entrepreneurship

Scarcity and Social Choice On the face of it, scarcity of these resources causes the scarcity of all goods and services produced out of them. Not entirely true. Misallocation of resources at least partly responsible too.

Scarcity and Social Choice Hence, society has to choose: –What to produce/ what not to produce? –How much to produce? –How to produce?

Economics – some distinctions we make By the level of detail Microeconomics – study of the behaviour of individual households, firms and govts.; the choices they make; and their interactions. Macroeconomics – study of the behaviour of the overall economy

Economics – some distinctions we make By our purpose of analysis: Positive economics deals with how the economy works – bare facts. Normative economics deals with what should be – used to make judgements about the economy, identify problems and prescribe solutions

Why Economists disagree? The difference of opinion may be positive in nature – happens when knowledge is imperfect or when facts are in dispute More likely it is normative – two economists put value on two different things

Methods of Economics – the Model A model is an abstract representation of reality A model should be as simple as possible to accomplish its purpose A model does not mirror reality – it explains reality