Principles of Microeconomics

Introduction to Microeconomics

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Session Overview

Economics may have a reputation as a dismal science, but in fact it addresses some of the most fundamental problems we face: How to make the best decision given that resources are limited. You can use the tools of microeconomics to decide how best to spend your income; how best to divide your time among leisure activities; or how many people to hire in the business you run. Life is full of choices. Microeconomics can help you decide how to make them. Economics can’t help you make a selection from this box of chocolates, but can be a vital tool in other decision-making situations. Image courtesy of ninanord on Flickr.

Keywords: Microeconomics; prices; normative economics; positive economics; microeconomic applications.

Session Activities

Readings

Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:

• [R&T] Chapter 1, “Economics: The Study of Choice.”
• [Perloff] Chapter 1, “Introduction.” (optional)

Lecture Videos

Check Yourself

Concept Quiz

This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.

Question 1

Which of the following is an accurate description of the primary theme of microeconomics?

A set of constrained optimization problems. close

All of these. check

Analyzing tradeoffs. close

Studying how individuals and firms make themselves as well off as possible given conditions of scarcity. close

Check   Show Solution

All three of these answers encapsulate the main theme of microeconomics in a different way: constrained optimization problems allow us to analyze how individuals and firms can make themselves as well off as possible given scarcity. This entails analyzing the trade-offs between investing in different activities.

Question 2

What is a model?

A description of an economic phenomenon that makes no extra assumptions. close

A full description of a particular economic phenomenon. close

An empirical study that analyzes how a certain part of the economy works. close

Any description of the relationship between two or more economic variables. check

Check   Show Solution

Models do not provide a complete description of a particular economic phenomenon; instead, they make simplifying assumptions that render the model more tractable to work with. While empirical studies may make use of models, they are not identical.

Question 3

What is the key assumption in microeconomics?

Firms maximize profits. close

Firms maximize sales. close

Individuals maximize their income. close

Individuals maximize utility and firms maximize profits. check

Check   Show Solution

Though it is accurate to say that firms maximize profits, it is incomplete. Individuals dont solely maximize income, rather utility, and sales and profits for a firm are not identical.

Question 4

What is the distinction between empirical and theoretical economics?

Theoretical economics analyzes individuals and empirical economics analyzes firms. close

Theoretical economics analyzes long-term phenomena and empirical economics analyzes short-term. close

Theoretical economics builds models, and empirical economics test them. check

Theoretical economics tests models, and empirical economics builds them. close

Check   Show Solution

Both theoretical and empirical economics can analyze either individuals or firms, and either short-term or long-term phenomena.

Question 5

Which of the following statements represents normative, rather than positive analysis?

People should not be allowed to purchase bodily organs, because it allows the rich access to a life-saving procedure that the poor may not have access to. check

Since the supply of gems is limited, their price is very high. close

Since the supply of water is very large, the price of water is very low. close

The demand for organ transplants currently far exceeds the supply. close

Check   Show Solution

This is a normative statement that is based on an assumption of equity (we want rich and poor to have equal access to treatment.) The others answers are positive statements that are based on facts about the supply and demand of goods in different markets.

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