Chapter+1+(JEM)+-+Six+Principles+of+Micro-Economics

Economics can be defined as a study of economics or how to manage scarce resources. Because there are unlimited wants, or greed, and limited resources, or **scarcity**, people must know how to manage the resources efficiently so that they satisfy the people. For this, an economist studies how people make decisions, how they interact, and what causes changes in people's behavior. Although there are many impulsive patterns and anomalies, in micro-economics, economists focus on six main principles:

1. When people make decisions, they face **trade-offs**. In other words, when people are to get what they want, they usually have to give up another. For instance, a trade-off that a society often faces is the decision between clean environment and a high level of income. If the society decides to have a clean environment and have many regulations to avoid pollution, it generally costs the firms more cost to produce, reducing the income of the owners. Another trade-off that is always in concern is **efficiency**, the measure of how well a society can produce from its scarce resources, and **equity**, the measure of how much the society distributes economic assets to the citizens. When there is a high level of equity, people start to lose incentives and efficiency drops - it also works visa-versa.

2. There is always a cost to everything when one makes a decision. Not like the costs for food, shelter, and transporations when you go to a trip, but what one has to give up for it. When one goes to a trip during the summer, he/she loses the time he/she could have spent in studying for colleges. This cost, usually, the time, is called a **opportunity cost**.

3. People are generally considered to be **rational people**, who do the best they can systemetically to get what they want. **Marginal changes**, the extra adjustments to the plan, and divided into marginal costs and marginal benefits, are the factors that people consider when making decisions. For example, when buying oranges in a grocery store, people three oranges and are deciding whether to buy more or not, given that the price decreases if they buy more as a set. They would definitely buy more if the marginal benefit of buying an extra orange exceeds the marginal cost.

4. Because people are rational, they act upon **incentives** - the merits that induces people to take actions. They buy more oranges because they like oranges and the more they buy, the less the cost of oranges. When deciding what to buy between a labtop and a home computer, they start thinking of the costs. If the cost of home computers is higher than that of labtops, they would buy labtops because it costs less. The product having a less cost than the other became an incentive for people to buy the product. In other example, people go to colleges because of the incentive that the college offers; by going to a college, they gat a higher chance of getting a better job at a higher wage.

5. Trade is a system of commerce that can make everyone better off. Let's say that there are two countries: Britannia and United Asia. Britannia is better in producing computers, but worse in producing rice. U.A. is better in producing rice, but worse in producing computers. Because each country has its own specialized area, they start to trade. Britannia would export computers while U.A. export rice. By doing this, the countries can produce only the products that they can produce the most and gain more than what they can usually produce for the worse production products. They both end up gaining more.

6. Today, most of the nations have a **market economy**, where there are many firms and households to make decisions and interact in a market for goods and services, because it is proven to be very efficient and a good way to organize economic activity. In Adam Smith's __Of the Wealth and Nations__, people are guided by what Smith refers to as "invisible hand." Every person acts individually, indifferent of other people, and only caring about their own benefits. In a market, when the price of a good is high, people tend not to buy that good. Because people don't buy the good, the firm lowers its price to give an incentive to the people to buy it. Now, with a lowered price, more people buy the product than before.

Humorous version of 10 principles of economics: []