Principles of Economics

Presenters:
• Hareem Nauman ( Roll no.36)
• Huba Shahid Ahmad ( Roll no. 47)
• Saifullah ( Roll no.24)
 What is Microeconomics?
 Microeconomics is the social science that studies
the implications of incentives and decisions,
specifically about how those affect the utilization
and distribution of resources.
 According to Marshall, the study of individual
markets and industries, as opposed to the study of
the whole economy.
 Examples:
 Consumer equilibrium, individual income and
savings are examples of microeconomics.
 Principle 4: People respond to
incentives
 Incentive: something that induces a
person to act, i.e. the prospect of a
reward or punishment.
 Rational people respond to incentives.
Examples:
 When gas prices rise, consumers buy
more hybrid cars and fewer gas
guzzling SUVs.
 When cigarette taxes increase,
teen smoking falls.
Example: seat belt laws.
The direct effect is that the driver is more likely to survive
an accident, so seat belts save lives.
The indirect effect on incentives is that accidents are now
less costly, so the new cost- benefit calculation causes
drivers to drive faster. One 1975 study found that the laws
led to more accidents, but fewer driver deaths per accident.
Overall driver deaths remained about the same but
pedestrian deaths increased.
 Principle: 9
Prices rises when government prints
too much money.
 Inflation is an increase in the overall level of
prices in the economy.
 One cause of inflation is the growth in the
quantity of money.
 When the government creates large quantities
of money, the value of the money falls.
  As more money is circulating within the
economy, economic growth is more likely to
occur at the risk of price destabilization.
 Principle 1: People face trade off
 “There is no such thing as a free lunch!”
 What is trade off?
 We have to make a decision to choose one alternative out of the
many alternatives available to us. If there is no other alternative for a
choice.
 To get one thing, we usually have to give up another thing.
All decisions involve tradeoffs. Examples:
 Going to a wedding the night before your midterm leaves less time
for studying.
 Having more money to buy stuff requires working longer hours,
which leaves less time for leisure.
 Society faces an important tradeoff:
efficiency vs. equality
 Efficiency: when society gets the most from its
scarce resources
 Equality: when prosperity is distributed uniformly
among society’s members
 Tradeoff: To achieve greater equality, could
redistribute income from wealthy to poor.
But this may reduce incentive to work and produce,
shrinks the size of the economic “pie.”
Principle 6:
Markets are usually a good way to organize Economic activity.
 Market: a group of buyers and sellers
(need not be in a single location)
 “Organize economic activity” means
determining
 what goods to produce
 how to produce them
 how much of each to produce
 who gets them
A market economy allocates resources
through the decentralized decisions of many
households and firms as they interact in
markets.
Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.
Principle #10
Society faces a short-run tradeoff between inflation and unemployment.

Inflation or Unemployment
It’s a short-run trade-off!
Inflation: steady increase in prices
Unemployment: The term
unemployment refers to a situation
where a person actively searches for
employment but is unable to find
work.
 Why Policymakers face a short-run tradeoff between inflation and
unemployment? 
 Policymakers face a short-run trade-off between inflation and
unemployment because of the negative relationship between the
inflation rate and the economy's unemployment rate. Policymakers
formulate policies to increase employment in the economy.
 How policy makers can exploit the tradeoff between inflation and
unemployment?
 Policymakers can exploit the short run tradeoff between inflation and
unemployment using various policy instruments. By changing the
amount that the government spends, the amount it taxes, and the amount
of money it prints, policymakers can influence the combination of
inflation and unemployment that the economy experiences
 Principal: 2
The cost of something is what you give up to get it.

 Making decisions requires

comparing the costs and benefits of
alternative choices.
 The opportunity cost of any item is
whatever must be given up to obtain
it.
 It is the relevant cost for decision
making.
 Basketball star LeBron James understands opportunity costs and
incentives. He chose to skip college and go straight from high school
to the pros where he earns millions of dollars.
The opportunity cost of…
…going to college for a year is not just the tuition, books, and fees, but also the
foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.