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Microeconomics and Behaviour
Microeconomics and Behaviour
Robert H. Frank, Cornell University
Ian C. Parker, University of Toronto
Thinking Like an Economist

Chapter Outline

  1. Microeconomics is the study of how people choose under conditions of scarcity.
    1. If the benefits of an alternative outweigh the costs, that alternative is chosen.
    2. Economic models are designed to help predict which choices will be made.
  2. Decisions based on economic criteria weigh the benefits and costs of taking a particular action and only proceed if the benefits outweigh the costs.
    1. The costs and benefits must be the full opportunity costs and benefits.
    2. The calculations are often unconsciously made or not thought of as explicit calculations.
    3. Costs (and benefits) imposed on others as a result of an individual’s actions should be considered if efficiency is to be expected.
  3. Choices are often made incorrectly because of common mistakes in thinking.
    1. People tend to ignore some opportunity costs.
    2. People consider sunk costs when they should be ignored.
  4. The "invisible hand" of a market economy allocates resources to their best use as people pursue their preferences.
  5. If external costs or benefits are present, the market is unable to allocate as efficiently.
  6. The self-interest standard of rationality assumes that people choose based on how the costs and benefits of a decision impact them personally
  7. The present-aim standard of rationality assumes that people choose based on whatever aims or objectives are important to them at the moment.
  8. Homo economicus does not attract others because egoistic motives ignore too much of the richness of life.
  9. Marginal analysis is essential to good decision making because the costs and benefits that really matter are those at the margin.
  10. The economic naturalist recognizes that life is full of tradeoffs at the margin rather than a constant search for perfection.
  11. Normative economics deals with what should be, and positive economics seeks to explore how the economy works.
  12. Microeconomic behaviour focuses on the individual and the organization while macroeconomic behaviour aggregates microeconomic behaviour and looks at the summed categories.




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