INTRODUCTION TO MICROECONOMICS TA: BÙI THỊ MỸ TRÀ

CHAPTER 1: TEN PRINCIPLES OF ECONOMICS

- Scarcity refers to the limited nature of society’s resources. (Ex: water in a city…)
- Economics is the study of how society manages its scarce resources (fuel, labor…)
• Ten principles of economics:
+ Principle #1: People Face Tradeoffs:
- All decisions involve tradeoffs
- Society faces an important tradeoff: efficiency vs. equality.
Ex: Mình làm 1 cái bánh pizza (economic pie), mình muốn làm cho chiếc bánh này to ra
nhất có thể để cho 4 bạn đều nhận được lợi ích tối đa (efficiency) và muốn chia cho 4 bạn
các phần bánh bằng nhau (equality)

Ex case: Daniel decides to spend an hour playing basketball rather than working at $6 per
hour. His tradeoff is
a. nothing, because he enjoys playing basketball more than working.
b. the increase in skill he obtains from playing basketball for that hour.
c. the $6 he could have earned.
d. nothing, because he spent $6 for admission into the sports complex to play
basketball.
- Để đạt được equally thì rất khó để đạt được trọn vẹn efficiency. Mình phải tradeoff giữa
2 thứ. (Chính phủ không thể nào hỗ trợ người giàu, giúp họ có thêm tiềm lực làm xã hội
giàu hơn mà còn có thể lấy tax của họ để hỗ trợ cho người nghèo để công bằng được ->
họ sẽ không chịu làm việc tích cực nếu tiền của họ chỉ dể đóng tax cho người nghèo)

+ Principle #2: The Cost of Something Is What You Give Up to Get It.
- The opportunity cost of any item is whatever must be given up to obtain it.
Ex: You spend 1 hour to study Microeconomics instead of going to work for $24/hr. The
opportunity cost of 1 hour study Microeconomics is 1 hour working for $24.
- The accounting cost of an item is the total monetary value of expenditures for an item.
- Opportunity costs are different from accounting costs.

Ex: The opportunity cost of going to college is

a. the total spent on food, clothing, books, transportation, tuition, lodging, and other
expenses.
b. zero for students who are fortunate enough to have all of their college expenses
paid by someone else.
c. the value of the best opportunity a student gives up to attend college.
d. zero, since a college education will allow a student to earn a larger income after
graduation.

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+ Principle #3: Rational People Think at the Margin:

- A person is rational if he systematically and purposefully does the best he can to achieve
his objectives. Many decisions are not “all or nothing,” but involve marginal changes –
incremental adjustments to an existing plan.
• Marginal changes: To describe small incremental (Ex: thay đổi 1 đơn vị nào
đó như hàng hóa, lao động)
• Marginal benefit: your additional enefit when increasing 1 product. (Ex:
niềm vui của bạn sẽ tăng lên nếu ăn thêm 1 tô phở). The value depends on
the initial value of benefit.
• Marginal cost: chi phí tăng lên bao nhiêu khi sản xuất thêm 1 đơn vị đầu ra
- An action will occur when Marginal benefit > Marginal cost.

Ex: Which of the following is the best example of a marginal change?

a. Mark graduates from college and takes a job. His income increases from $10,000
per year to $50,000 per year.
b. The price of housing rises in Seattle by 25% in one year.
c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to
$5.20 per hour.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per
bushel to $8.00 per bushel.

You have spent $500 purchasing and repairing an old car which you expect to sell for $800
once the repairs are complete. You discover that you need an additional part, which will
cost $400, including labor, in order to complete the repairs. You can sell the car as it is
now for $300. What should you do?
a. You should complete the repairs and sell the car.
b. You should cut your losses and take the $300.
c. You should never sell something for less than it costs.
d. It doesn’t matter which action you take; the outcome is the same either way.

+ Principle #4: People respond to incentives.

- Incentive is something that induces a person to act, i.e. the prospect of a reward or
punishment.
Ex: When the price of gasoline increases, people will use motorbikes less and use electric
bike of Vinfast more/ The price of cigarette increase makes the number of students using
cigarette to be decreased/ You will work harder if you know there will be extra bonus.

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+ Principle #5: Trade Can Make Everyone Better Off.

- Countries benefit from trade & specialization:
• For the country that specialized in that good, they can export that product with
higher price than other countries.
• One country can also import the product that is produce in another country with
lower price
Ex: Vietnam is specialized in produce agricultural product with thousand years of
experience. The farmer in Vietnam would sell their price for a higher price when it’s
exported to another country compared to Vietnam. For those country that is not specialized
in producing rice, they can buy rice with lower price from Vietnam instead of growing
themselves.

Ex: If Canada is better than the U.S. at producing hockey sticks, but the U.S. is better
than Canada at producing roller blades,
a. the U.S. should impose a tariff on Canadian hockey sticks in order to protect jobs
in the U.S. roller blade industry.
b. the U.S. should sell roller blades to Canada, and should buy Canadian
hockey sticks.
c. the U.S. should subsidize its hockey stick industry so that it can compete with
Canadian hockey sticks.
d. the U.S. should put a quota on the amount of Canadian hockey sticks imported.

+ Principle #6: Markets Are Usually A Good Way to Organize Economic

Activity.
- Each of these households and firms acts as if led by AN INVISIBLE HAND (Adam
Smith) to promote general economic wellbeing. The invisible hand works through the
price system.
- The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
- Market: a group of buyers and sellers (need not be in a single location)
- “Organize economic activity”:
• What goods to produce?
• How to produce them?
• How much of each to produce?
• Who gets them?
- Interaction of buyer and sellers determines prices:
• Each price reflects the good’s value to buyers and the cost producing the
good.
• Prices guide self-interested household and firms to make decision ->
maximize society’s economic well-being.

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- In the market economy, economic activity is guided by price.

+ Principle #7: Governments Can Sometimes Improve Market Outcomes.
- Important role for government: enforce property rights. Government may alter market
outcome to promote efficiency and equity.
• Enforce rules and maintain institutions that are key to a market economy
• Need institutions to enforce property rights
• Promote efficiency, avoid market failure
Ex: Mọi người sẽ có xu hướng ít làm việc, sản xuất, đầu tư hoặc mua sắm nếu rủi ro lớn
về tài sản của họ bị đánh cắp → nhà nước phải bảo vệ quyền tư hữu của họ
- Market failure: a situation in which the market on its own fails to allocate resources
efficiently.
- Market failure cause:
• Externalities: the impact of one person’s actions on the well-being of a
bystander (The impact of pollution from a factory on the health of people in
the vicinity of the factory)
• Market power: monopoly (where there is just one firm in the market and it
control all the price and the goods in the market)

Ex: example of a monopoly would be

a. a sole provider of electrical power in a city.
b. a gasoline service station in Los Angeles.
c. a grocery store in Chicago.
d. a hospital in Missouri.

- The two best reasons for a government to intervene in a market are to:
• Promote equality: avoid disparities in economic wellbeing: thuế hoặc chính
sách phúc lợi xã hội có thể thay đổi cách phân chia miếng bánh kinh tế nếu
sự phân bổ lợi ích kinh tế chênh lệch quá lớn (khoảng cách giữa người giàu
và người nghèo)
• Promote efficiency.
+ Principle #8: A country’s standard of living depends on its ability to produce
goods & services.
- The most important determinant of living standards: productivity (the amount of goods
and services produced per unit of labor).
- Living standards are different for each country (Ex: The US will have higher living
standards than countries in Africa).

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𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠

- Productivity =
𝑈𝑛𝑖𝑡 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟
- Productivity depend on equipment, skills, technology.
- Higher productivity → higher living standard and higher average income.

Ex: the average income of an American is higher than the average income of an Italian, it
is most likely because
a. labor unions are more aggressive in the United States than in Italy.
b. the United States has a more industrial economy than Italy.
c. there is more competition in the United States than in Italy.
d. productivity is higher in the United States than in Italy.

+ Principle #9: Prices rise when the government prints too much money
(Inflation)
Why don’t the government print more money so that we can become richer?
- Inflation: an increase in the overall level of prices in the economy (The price of a bowl
of Phở use to be 20.000VND and now it become 50.000 VNĐ)
- In the long run, inflation is almost always caused by excessive growth in the quantity
of money, which causes the value of money to fall.
- The faster the govt creates money, the greater the inflation rate.
+ Principle #10: Society faces a short-run tradeoff between inflation and
unemployment
- In the short run, reducing inflation is associated with rising unemployment.
- Short run: reducing inflation is associated with rising unemployment. (Kích thích chi
tiêu, tăng nhu cầu về hàng hóa và dịch vụ → công ty tăng giá, thuê nhiều công nhân để
sản xuất → giảm tỉ lệ thất nghiệp)
- Long run: Inflation increase → Money increase → Bankrupt → Increase
unemployment.
- One explanation of the tradeoff between inflation and unemployment is that prices are
sticky

Ex: Between 1929 and 1933, the U.S. economy went from a situation of full employment
to one of 25% unemployment. What do you assume happened to prices?
a. Prices were unaffected.
b. Prices fell and the economy experienced deflation.
c. Prices rose and the economy experienced inflation.
d. It is impossible to guess what happened to prices from the information given.

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