| name | ECON490-Microeconomics |
| description | Apply the economic models, decision rules, and chapter references from Economics: Principles, Applications, and Tools, Ninth Edition, Global Edition. |
Economics: Principles, Applications, and Tools
Authors: Arthur O'Sullivan, Steven M. Sheffrin, and Stephen J. Perez | Source: 769 pages, 32 chapters | Edition: Ninth Edition, Global Edition (2018) | Generated: 2026-08-20
Core Frameworks & Mental Models
Use the economic way of thinking before reaching for a policy answer: identify scarcity, state the relevant assumptions, hold other causes fixed, compare marginal benefits and costs, and predict how incentives change behavior. Separate positive questions (what is or will be) from normative questions (what ought to be). A model is a purposeful simplification; reject an assumption only if it changes the conclusion for the question being asked.
The five key principles
- The Principle of Opportunity Cost: The opportunity cost of something is what you sacrifice to get it. Count explicit payments and implicit costs such as forgone wages, interest, time, and the best alternative use of an owned asset.
- The Marginal Principle: Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. Ignore sunk costs when they cannot change the current decision.
- The Principle of Voluntary Exchange: A voluntary exchange between two people makes both people better off. For specialization, calculate comparative advantage from opportunity cost, not absolute productivity.
- The Principle of Diminishing Returns: If we increase one input while holding the other inputs fixed, output will increase, but at a decreasing rate. Always name the fixed input and the time horizon before applying the rule.
- The Real-Nominal Principle: What matters to people is the real value of money or income - its purchasing power - not the face value of money or income. Deflate wages, benefits, debt, interest, and GDP before comparing welfare or output across time.
Micro decision rules
- Trade and institutions: Assign production to the lower-opportunity-cost producer; mutually beneficial terms of trade lie between the two opportunity costs. Treat prices as information, then check whether property rights, contracts, competition, insurance, and usable information allow private incentives to produce the social result.
- Demand, supply, and equilibrium: A change in the good's own price moves along a curve; income, tastes, related prices, technology, input costs, taxes, subsidies, expectations, and the number of buyers or sellers shift a curve. A shortage puts upward pressure on price; a surplus puts downward pressure on price. For one demand shift, price and quantity move together; for one supply shift, they move oppositely.
- Responsiveness and revenue: Use percentage elasticity, not slope. If
Ed > 1, a price increase lowers total revenue; if Ed < 1, it raises revenue; Ed = 1 is locally unit elastic. Expect more response when substitutes, time to adjust, capacity, or budget share are larger.
- Efficiency and policy: A competitive equilibrium maximizes
total surplus = consumer surplus + producer surplus only with no external benefits, no external costs, perfect information, and perfect competition. Distinguish a transfer from deadweight loss. A binding ceiling creates a shortage; a binding floor creates a surplus; tax incidence follows relative elasticities, not the legal taxpayer.
- Consumer choice: Write the budget constraint, then shift the next dollar toward the good with the larger
MU/P until marginal utility per dollar is equalized. Explain a price response with substitution and income effects. Use defaults or precommitment when present bias makes future costs easy to ignore.
- Firm cost and output: Economic cost includes explicit and implicit opportunity costs. With a fixed input, diminishing marginal product eventually raises marginal cost. Use
MC < ATC to pull average cost down and MC > ATC to push it up. A competitive firm chooses output where P = MC, operates short-run when P >= AVC, and survives long-run only when revenue covers ATC.
- Market power and strategy: A monopolist chooses
MR = MC, then reads price from demand; a price-taking firm uses P = MC. Entry squeezes an incumbent through lower price, lower firm quantity, and higher average cost. In an oligopoly, find best responses, dominant strategies, and Nash equilibrium before trusting promises of cooperation. Test natural monopoly by asking whether duplicate infrastructure would cost more.
Macro decision rules
- Measure before explaining: Count only current final production in GDP and use value added to avoid double counting. Use
Y = C + I + G + NX; distinguish GDP investment from financial-asset purchases and government purchases from transfers. Use real GDP for quantities, nominal GDP for current-dollar scale, and a price index for purchasing power. GDP is not a complete welfare measure.
- Labor, capacity, and growth:
Labor force = employed + unemployed; the official unemployed must be actively seeking work. Separate frictional, structural, and cyclical unemployment; full employment removes cyclical unemployment, not all unemployment. Map equilibrium labor through Y = F(K,L) to obtain potential output. Compare living standards with real GDP per capita; use the rule of 70, capital deepening, technology, human capital, and institutions to explain sustained growth.
- Time horizon and shocks: With sticky wages and prices, a demand shock moves short-run output and prices in the same direction. An adverse supply shock raises prices while lowering output, creating stagflation. In the long run, factor supplies and technology determine output at
yp; demand expansion mainly raises the price level. Always state whether wages, prices, contracts, and expectations can adjust.
- Fiscal policy: Compare actual GDP with potential before choosing expansionary or contractionary policy. Size intervention with multipliers: spending multiplier
1/(1-MPC), tax multiplier -MPC/(1-MPC), and balanced-budget multiplier 1. Check leakages, inside and outside lags, automatic stabilizers, and whether a full-employment deficit crowds out private investment.
- Money and monetary policy: Trace
open-market purchase -> reserves and money supply rise -> interest rates fall -> investment, durable consumption, and net exports rise -> AD rises. Bond prices and interest rates move inversely. Allow for excess reserves, weak loan demand, expectations, exchange rates, and long outside lags. Money can affect real output temporarily but is neutral for real output in the long run.
- Inflation, deficits, and finance: Use
M * V = P * y; in growth rates, money growth + velocity growth = inflation + real-output growth. Unexpected inflation redistributes wealth between borrowers and lenders; anticipated inflation creates menu, shoe-leather, and tax costs. Diagnose a deficit through deficit = public borrowing + new money; persistent monetization can cause hyperinflation, while borrowing can crowd out capital.
- International choices: Use comparative advantage for trade, then trace who gains and who bears adjustment costs. A tariff raises domestic price and protects producers but creates lost trades; a quota also creates rents, with ownership depending on the rule. Define exchange-rate units before reasoning about appreciation, use the real exchange rate for competitiveness, and treat a current-account deficit as the mirror of foreign acquisition of domestic assets.
How to Use This Skill
- Start here for the Core Frameworks and the decision rules above.
- Ask by topic such as
elasticity, minimum wage, inflation, monopoly, or externalities; use the Topic Index to select the relevant chapter file.
- Ask by chapter such as
ch04 or chapter 24; load that linked file for definitions, examples, assumptions, and connections.
- Ask for a decision and state the time horizon, affected parties, constraint, and whether the question is positive or normative. Apply the smallest model that answers it, then state what the model omits.
Chapter Index
| # | Chapter | Main use |
|---|
| ch01 | Introduction: What Is Economics? | Scarcity, models, incentives, positive versus normative analysis |
| ch02 | The Key Principles of Economics | Five principles, PPC, marginal choice, real versus nominal |
| ch03 | Exchange and Markets | Comparative advantage, specialization, institutions, market failure |
| ch04 | Demand, Supply, and Market Equilibrium | Curves, shifts, shortages, surpluses, comparative statics |
| ch05 | Measuring a Nation's Production and Income | GDP, circular flow, national accounts, real output |
| ch06 | Unemployment and Inflation | Labor-force measures, unemployment types, CPI, inflation costs |
| ch07 | The Economy at Full Employment | Real wages, labor markets, production function, potential output |
| ch08 | Why Do Economies Grow? | Growth accounting, capital deepening, technology, institutions |
| ch09 | Aggregate Demand and Aggregate Supply | Sticky prices, AD-AS, multiplier, supply shocks |
| ch10 | Fiscal Policy | Fiscal multipliers, lags, automatic stabilizers, deficits |
| ch11 | The Income-Expenditure Model | Keynesian cross, consumption, inventories, saving-investment |
| ch12 | Investment and Financial Markets | Present value, real interest, intermediation, leverage |
| ch13 | Money and the Banking System | Money functions, deposits, reserves, lender of last resort |
|
Topic Index
- Aggregate demand and supply -> ch09, ch15
- Antitrust and regulation -> ch25, ch27, ch28
- Comparative advantage and trade -> ch03, ch18, ch19
- Consumer choice and utility -> ch20, ch21, ch22
- Costs, production, and profit -> ch02, ch07, ch23, ch24, ch25, ch26
- Demand, supply, and equilibrium -> ch04, ch20, ch21
- Exchange rates and balance of payments -> ch18, ch19
- Externalities and environmental policy -> ch21, ch30, ch31
- Fiscal policy and public finance -> ch10, ch11, ch17, ch30, ch32
- Growth and development -> ch07, ch08, ch12
- Inflation and unemployment -> ch06, ch09, ch15, ch16, ch17
- Information, insurance, and search -> ch03, ch12, ch13, ch21, ch29
- Investment and present value -> ch08, ch11, ch12, ch14
- Labor markets and income distribution -> ch06, ch07, ch18, ch20, ch32
- Market efficiency and surplus -> ch04, ch18, ch21, ch25, ch31
- Market power and pricing -> ch20, ch23, ch24, ch25, ch26, ch27, ch28
- Money, banking, and monetary policy -> ch05, ch09, ch13, ch14, ch15, ch16, ch17
- Opportunity cost and marginal reasoning -> ch01, ch02, ch03, ch20, ch22, ch23
- Public goods and public choice -> ch03, ch21, ch30, ch31
- Strategic behavior and game theory -> ch25, ch26, ch27, ch28
- Tax incidence and deadweight loss -> ch17, ch18, ch20, ch21, ch31
Supporting Files
- glossary.md - significant terms and concise chapter references
- patterns.md - actionable models with use conditions, steps, and trade-offs
- cheatsheet.md - compact formulas, thresholds, decision rules, and diagnostic tells
Scope & Limits
This is an educational study and reference skill synthesized from Economics: Principles, Applications, and Tools, Ninth Edition, Global Edition, published in 2018. Its examples, data, institutions, and policy debates are historical. It is not current economic, investment, tax, legal, or public-policy advice; verify current data, laws, institutions, and policy settings before acting. Models are deliberately simplified, so state assumptions and distinguish positive analysis from value judgments.
