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Perloff Chapter 1 Summary

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Microeconomics Chapter 1
–Introduction-

Microeconomics: * The study of how individuals and firms make themselves as well of as possible in a world of scarcity(shortage) and the consequences of those individual decisions for markets and the entire economy. * Often called price theory: emphasize the important role of the price
1.1 Microeconomics: The Allocation of Scare Resources

Trade-Offs: * Which goods and services to produce: limitation of production, resources ( worker, raw materials, capital and energy) * How to produce: to produce a given output a firm needs to use more of one resource and less of another * Who gets the goods and services: the more of society’s goods and services you get, the less someone else gets
Who makes the Decisions: * The government * A company
Price Determine Allocations: * Market: an exchange mechanism that allows buyers to trade with sellers
1.2 Models
Model:
* a description of the relationship between two or more economic variables * can be used to predict the effect of a change of one variable
Simplifications by Assumptions: * Example: Income threshold model of China to explain car purchasing behavior in China * Only the income is important
Testing Theories: * Testing theories by checking whether predictions are correct
Positive vs. Normative: * Positive statement: a testable hypothesis about cause and effect * Test the truth of a statement * Normative statement: a conclusion as to whether something is good or bad * About something somebody believes should happen

1.3 Uses of Microeconomics Models * Help to make predictions * Can be useful for individuals, governments and firms in making decisions * Individuals: purchasing or other decisions * Firms: which production method to maximize profit * Government:

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