BBAA-501: Principles of Microeconomics

10 Principles
of Economics
P R E S E N T E D TO : S I R S H O A I B N A S I R
P R E S E N T E D B Y: A B D U L R E H M A N
( 2 0 1 8 - U A M - 11 2 5 )
BBA-AGRIBUSINESS 5TH SEMESTER
 People Face Trade offs

 Making decisions requires trading one goal for

another.
 Recognizing that trade-offs exist does not indicate
what decisions should or will be made.

 Example:
 Going to a party the night before exam leaves
less time for studying.
 Protecting the environment requires resources
that could otherwise be used to produce
consumer goods
 The cost of something is what you
give up to get it
 Making decisions requires comparing the costs and benefits of alternative
courses of actions.
 Opportunity cost : Whatever must be given up to obtain some item.

 Example:
 If I’m attending college at a particular time, I’m paying opportunity cost
of what I could earn in the meantime.
 Being a Freelance Web developer, If I’m going to a concert to enjoy with
my friend, I’m paying opportunity cost of delay in $200 project that I just
got at Fiverr.
 Rational people think at the
margin

 Individuals and firms can make better decisions by thinking at the margin.
 By comparing the marginal benefits (MB) with the associated marginal costs
(MC) of a decision.

 Example:
 I decide to attend a webinar on “How to manage Stress” instead of
watching Ertugrul. In future, I’ll have a margin of handling stress better
than my coworkers at workplace.
 People respond to incentives
 Marginal changes in costs or benefits motivate people to respond.
 The decision to choose one alternative over another occurs when that
alternative’s marginal benefits exceed its marginal costs

 Example:
 When gas price rise, consumer buy more hybrid cars.
 Giving incentives to employees, make them work much effective and
efficiently than usual.
 Trade can make everyone
better off

 Trade allows people to specialize in what they do best.

 Rather than being self-sufficient, people specialize in producing one good or
service and exchange it for other goods.

 Example:
 If I can make good quality food dishes while my roommate excels in
making PPTs, I can trade with him to fulfill his hunger in exchange of my
quality designed PPT created by him.
 Markets are usually a good way
to organize economic activity

 Market economy : An economy that allocates resources through the

decentralized decisions of many firms and households as they interact in
markets for goods and services.
 Firms decide whom to hire and what to make while Households decide which
firms to work for and what to buy with their incomes.

 Example:
 In market, the interaction of buyers and sellers determines price.
 Governments can sometimes
improve market outcomes
 People are less inclined to work, produce, invest or purchase if there is a large
risk of their property being stolen.
 Govt can potentially improve market outcomes if there is a market failure or
if the market outcome is inequitable.

 Example:
 These are the Government’s policies that either attract or drive back
investors to invest in the country depending upon the law and order
situation in the country.
 Given the complexity and the tax law ambiguity prevailing in PK,
investors are hesitating to start their business in Pakistan.
 A country's standard of living depends on
its ability to produce goods and services

 Productivity = Standard of living

 Productivity: The amount of goods and services produced from each hour of a
worker’s time.

 Example:
 A country producing more goods means there is more to export and in this
way, they will surely be able to uplift the standard of living for its resident
in the form of increase income, less unemployment, etc.
 Prices rise when the government
prints too much money
 Usually, Central Bank prints approx. 2–3% of the total Gross Domestic
Production. This percentage depends on a country's economy and may vary
accordingly.
 In the long run, inflation is almost caused by excessive growth in the quantity
of money, which causes the value of money to fall.

 Example:
 If governments print money to pay off the national debt, inflation could
rise. This increase in inflation would reduce the value of its currency.
 Society faces a short-run tradeoff
between Inflation and unemployment
 An increase in the amount of money in the economy stimulates spending and
increases the demand of goods and services in the economy.
 Higher demand may over time cause firms to raise their prices but in the
meantime, it also encourages them to hire more workers to produce those
goods and services. More hiring means lower unemployment.

 Example:
 In the short-run (1-2 years), many economic policies push inflation and
unemployment in opposite direction.
 Reducing inflation entails costs to society in the form of higher
unemployment in the short run.
Thank Y o u