Principles of Microeconomics
By Robert Frank, Ben Bernanke, Kate Antonovics and Ori Heffetz
Chapter 1: Thinking Like an Economist
1. The Economic Way of Thinking
• Scarcity: Resources (time, money, materials) are limited, so choices must be made.
• Choice & Trade-offs: Every choice involves giving up the next best alternative—this is the
opportunity cost.
• Cost-Benefit Principle: An action is worth taking if its benefits exceed its costs.
Example: If a keyboard is $25 locally but $15 downtown—and you need to walk for
30 minutes—the benefit is $10. If your time costs less than $10, go downtown.
2. Opportunity Cost
• Defined as the value of the next best alternative that is forgone.
• Crucial for smart decision-making—both individuals and firms face opportunity costs.
3. Marginal Analysis
• Most decisions are made at the margin, considering small changes:
o Marginal benefit = additional satisfaction from one more unit.
o Marginal cost = additional cost from one more unit.
• Decision rule: Take the action if marginal benefit ≥ marginal cost.
4. Economic Surplus
• Defined as total benefit minus total cost.
• Optimal decisions maximize economic surplus.
5. Role of Incentives
• People respond to incentives—higher benefits or lower costs influence behavior.
,6. Positive vs. Normative Economics
• Positive: “What is” – objective statements, testable hypotheses.
• Normative: “What ought to be” – value judgments, opinions.
o E.g., “the government should…” is normative.
7. Tools of Economists
• Simple mathematical models, graphs, and logic.
• The Production Possibilities Frontier (PPF) illustrates trade-offs and opportunity cost
(more in Chapter 2).
Key Takeaways
Principle Summary
Scarcity We can’t have everything—choices required
Opportunity Cost The true cost is what you give up
Marginal Thinking Only net benefits matter
Economic Surplus Choose actions with positive surplus
Incentives Changes in rewards affect choices
Positive vs. Normative Fact vs. opinion-based analysis
Examples
• Walking for a cheaper keyboard: Benefit = $10 savings; if time cost < $10, walk.
• Marginal analysis: You’d walk the trip if your willingness-to-pay > cost until they
equalize.
, Practice Questions
Multiple Choice
1. If you buy coffee for ₹100 and miss ₹150 worth of study time, your opportunity cost is:
o A) ₹100
o B) ₹150
o C) ₹250
o D) ₹150 – ₹100
Answer: B) ₹150
2. Which scenario reflects marginal decision-making?
o A) Studying 4 hours instead of 2
o B) Deciding to eat one extra cookie after two
o C) Buying a car instead of renting
o D) Attending a concert
Answer: B) deciding on that one more unit
Short Answer
3. Explain economic surplus
o Surplus = benefit – cost. Take any action only if surplus ≥ 0.
4. Positive vs Normal:
o “Raising taxes will reduce consumption” = positive.
o “Taxes should be lowered” = normative.
Graphing
5. Draw a PPF curve showing the trade-off between two goods. Label opportunity cost and
explain unless the curve is straight (constant OC) or bowed (increasing OC).
Real-World Application
6. Apply Cost-Benefit Principle: Should you stay late studying for an exam or take a night
off?
o Identify extra hours’ benefit (increase in grade) vs costs (lost sleep or leisure).
, o Choose that yields greater surplus.
Practice Question Bank with Solutions
1. Opportunity cost problem
You earn ₹500/hour tutoring. You work 3 extra hours instead of attending a seminar priced at
₹800. What’s your opportunity cost?
Solution: ₹1,500 (forgone tutoring) + ₹800 = ₹2,300.
2. Marginal benefit & marginal cost
Selling lemonade: MB of 100th cup = ₹10; MC = ₹8. Should you sell?
Solution: Yes – MB > MC; increases surplus by ₹2.
3. Normative vs Positive
“Reducing working hours raises happiness.” Identify type.
Solution: Positive (causal prediction).
4. Economic surplus
Attended a workshop: benefit ₹2,000; cost ₹1,200. Surplus = ₹800. Good decision.
5. Graphing opportunity cost
On a PPF between food and clothing, moving from 5 food, 10 clothing to 6 food, 8 clothing: OC
of extra food = 2 clothes.
Key Takeaways
• Always weigh benefits vs costs, including hidden opportunity costs.
• Marginal thinking helps fine-tune choices efficiently.
• Understand the distinction between what is and what ought to be.
• Become an “economic naturalist” by applying these ideas to your daily life.
By Robert Frank, Ben Bernanke, Kate Antonovics and Ori Heffetz
Chapter 1: Thinking Like an Economist
1. The Economic Way of Thinking
• Scarcity: Resources (time, money, materials) are limited, so choices must be made.
• Choice & Trade-offs: Every choice involves giving up the next best alternative—this is the
opportunity cost.
• Cost-Benefit Principle: An action is worth taking if its benefits exceed its costs.
Example: If a keyboard is $25 locally but $15 downtown—and you need to walk for
30 minutes—the benefit is $10. If your time costs less than $10, go downtown.
2. Opportunity Cost
• Defined as the value of the next best alternative that is forgone.
• Crucial for smart decision-making—both individuals and firms face opportunity costs.
3. Marginal Analysis
• Most decisions are made at the margin, considering small changes:
o Marginal benefit = additional satisfaction from one more unit.
o Marginal cost = additional cost from one more unit.
• Decision rule: Take the action if marginal benefit ≥ marginal cost.
4. Economic Surplus
• Defined as total benefit minus total cost.
• Optimal decisions maximize economic surplus.
5. Role of Incentives
• People respond to incentives—higher benefits or lower costs influence behavior.
,6. Positive vs. Normative Economics
• Positive: “What is” – objective statements, testable hypotheses.
• Normative: “What ought to be” – value judgments, opinions.
o E.g., “the government should…” is normative.
7. Tools of Economists
• Simple mathematical models, graphs, and logic.
• The Production Possibilities Frontier (PPF) illustrates trade-offs and opportunity cost
(more in Chapter 2).
Key Takeaways
Principle Summary
Scarcity We can’t have everything—choices required
Opportunity Cost The true cost is what you give up
Marginal Thinking Only net benefits matter
Economic Surplus Choose actions with positive surplus
Incentives Changes in rewards affect choices
Positive vs. Normative Fact vs. opinion-based analysis
Examples
• Walking for a cheaper keyboard: Benefit = $10 savings; if time cost < $10, walk.
• Marginal analysis: You’d walk the trip if your willingness-to-pay > cost until they
equalize.
, Practice Questions
Multiple Choice
1. If you buy coffee for ₹100 and miss ₹150 worth of study time, your opportunity cost is:
o A) ₹100
o B) ₹150
o C) ₹250
o D) ₹150 – ₹100
Answer: B) ₹150
2. Which scenario reflects marginal decision-making?
o A) Studying 4 hours instead of 2
o B) Deciding to eat one extra cookie after two
o C) Buying a car instead of renting
o D) Attending a concert
Answer: B) deciding on that one more unit
Short Answer
3. Explain economic surplus
o Surplus = benefit – cost. Take any action only if surplus ≥ 0.
4. Positive vs Normal:
o “Raising taxes will reduce consumption” = positive.
o “Taxes should be lowered” = normative.
Graphing
5. Draw a PPF curve showing the trade-off between two goods. Label opportunity cost and
explain unless the curve is straight (constant OC) or bowed (increasing OC).
Real-World Application
6. Apply Cost-Benefit Principle: Should you stay late studying for an exam or take a night
off?
o Identify extra hours’ benefit (increase in grade) vs costs (lost sleep or leisure).
, o Choose that yields greater surplus.
Practice Question Bank with Solutions
1. Opportunity cost problem
You earn ₹500/hour tutoring. You work 3 extra hours instead of attending a seminar priced at
₹800. What’s your opportunity cost?
Solution: ₹1,500 (forgone tutoring) + ₹800 = ₹2,300.
2. Marginal benefit & marginal cost
Selling lemonade: MB of 100th cup = ₹10; MC = ₹8. Should you sell?
Solution: Yes – MB > MC; increases surplus by ₹2.
3. Normative vs Positive
“Reducing working hours raises happiness.” Identify type.
Solution: Positive (causal prediction).
4. Economic surplus
Attended a workshop: benefit ₹2,000; cost ₹1,200. Surplus = ₹800. Good decision.
5. Graphing opportunity cost
On a PPF between food and clothing, moving from 5 food, 10 clothing to 6 food, 8 clothing: OC
of extra food = 2 clothes.
Key Takeaways
• Always weigh benefits vs costs, including hidden opportunity costs.
• Marginal thinking helps fine-tune choices efficiently.
• Understand the distinction between what is and what ought to be.
• Become an “economic naturalist” by applying these ideas to your daily life.
