Microeconomics Theory and How Individuals Make Decisions Within an Economy

Current microeconomics theory and thought is based on the same premises it has been for years. These thoughts and theories were developed through research, observation, trial, and error. There are essentially ten principles in Economics. These principles will be discussed as well as the ideas and lessons which support these principles. Furthermore, this paper will explain how individuals make decisions within an economy, how individuals interact economically, how scarce resources are managed, as well as various economics terms and their correlation with one another.

The first economics lesson which should be utilized and referred to is the ten principles of economics. The ten principles state how individuals make decisions, how they interact, and how the economy as a whole operates. The first four principles relate to how individuals make decisions. According to Mankiw (2015), People essentially give up one thing for another at all times whether it be money, resources, or time. Whatever someone is giving up in exchange for what they are gaining is essentially the cost for which they are attaining. Mankiw also asserted that rational individuals utilize and make decisions based on the margin. Lastly, in relation to how individuals make decisions, they respond to incentives.

The second set of principles refer to how individuals interact with one another. These principles state that trades can benefit everyone, a good way to organize economic activities is through a market, and Governments have the capabilities to improve market outcomes (Mankiw, 2015). The third portion of the principles address how an economy works as a whole. These principles state that a country’s ability to produce goods and services directly influences a country’s standard of living. Also, the prices within a country will rise due to an over printing of money by the government. Furthermore, “society faces a short-run trade-off between inflation and unemployment” (Mankiw, 2015).

Society manages its scarce resources by allowing a free market to exist (Mankiw, 2015). Free markets allow individuals to work at their optimal levels and contribute to the overall efficiency of the whole. Furthermore, all the principles mentioned previously work together to determine how scarce resources are allocated. The supply and demand curves slope in opposite directions because as the demand for an item rises, the supply of that item decreases. As the demand increases, the supply decreases. For example, if a hundred people all wish to purchase the same brand of a particular product at around the same time from the same vendor, the supply then diminishes. If shown in graphical representation, we would see the supply curve go in one direction as the demand goes in the opposite direction.

Economic interdependence is essentially the idea that all individuals in society depend upon and benefit from one another. The products or services that one person needs are provided by another individual in exchange for something of value that is needed by the person that is provided these products or services. This exchange among individuals is ever changing and never ending, thus allowing the economy to keep functioning properly. Government policies are aimed at ensuring that the economy functions optimally. Public policies established and implemented by the government are designed to enable market equality in order for a market to succeed. (Mankiw, 2015).

The market are at equilibrium when the supply and demand curves meet. When the price of a certain product is at a point in which there is sufficient demand and is not too expensive, this can be achieved. If the price of a product is too low, it raises the demand for that product. If a price is too high, it lowers the demand as many individuals will look for an alternative to meet their needs. Depending on the price of something, it may fail because the supply exceeds the demand, or the demand exceeds the supply. Optimally a product or service will meet the demand and still make the profit necessary to continue production without taking a loss. Based on the principals mentioned previously, the economy functions.