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Chapter 1, Problem aWYWL

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Microeconomics

5th Edition
Paul Krugman + 1 other
ISBN: 9781319098780

Solutions

Chapter
Section
BuyFindarrow_forward

Microeconomics

5th Edition
Paul Krugman + 1 other
ISBN: 9781319098780
To determine

Principles which guide Individuals for making choices

Concept Introduction:

Micro-economics is the study of individual units, in particular, households, firms, to study their behavior in decision making and allocation of resources.

Explanation

Principles are:

  1. People must make choices b/c resources are scarce
  2. In an economy, resources are limited and scarce to fulfill the wants of people. This is the basic problem in the economy, as people wants are unlimited and resources are limited in nature. Moreover, resources have alternative uses, due to which complexity in choosing what to produce becomes difficult.

  3. The opportunity cost of an item, what you must give up in order to get it is its true cost
  4. In an economy, since resources are scarce, and they have alternative uses, creates a problem in an economy of what to produce and how much. The solution can be obtained if the opportunity cost is taken into consideration.
    For example, if a person books a ticket for a movie of $10 for the following day. The next day, rain starts, and he could not go. So, the opportunity cost is not only the amount of ticket but also the entertainment he would have had, after watching it.
    So, the opportunity cost is the cost for the next best alternative foregone.

  5. People face trade-offs:
  6. In an economy, people have limited income to spend and resources to produce. They have to make choice of what is to be purchased with the budget constraint.
    For example, if a person has $100, he has two choices, whether to purchase home theatre or buy books for his following academic year.
    In the above example, two choices are available, so he has to give up one thing in order to purchase another. So, an individual always has the trade-off between income and resources.
    So, the opportunity cost is the cost for the next best alternative foregone.

  7. People respond to Incentive
  8. In an economy, if people are given incentives, people have a tendency to purchase it.
    For example, if $1000 is the rebate given to consumers for purchasing an efficient refrigerator, it would be an incentive for consumers to purchase it.

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