Ten Principles of Microeconomics and how markets work.

1. 1
Ten Principles of Microeconomics and How Markets Work
Stacey Troup
Principles of Microeconomics/ECO-365
July 18, 2016
Ashok Padhi

2. 2
Ten Principles of Microeconomics and How Markets Work
This Week 1 paper will first define the Ten Principles of Economics and then will discuss
how society manages its resources and benefits from economic interdependence, why the
demand curve slopes downward and the supply curve slopes upward, where the point of
equilibrium is and what it defines and finally, the impact of price controls, taxes and elasticity on
the changes in supply, demand and equilibrium prices.
The Ten Principles of Economics
We learn from this week’s reading that there are Ten Principles which include: “1)
People face tradeoffs; 2) the cost of something is the price you are willing to pay to obtain it; 3)
rational people think at the margin; 4) people respond to incentives; 5) trade is beneficial to
everyone; 6) markets are considered a valuable central place for economic activity; 7)
governments can, and sometimes do, improve market outcomes; 8) the standard of living of any
country is dependent on its ability to provide goods and services; 9) prices rise when
governments print too much money; and 10) society faces a short-run trade-off between inflation
and unemployment” (Mankiw, 2015)
How Society Manages its Resources
Economics is the study of how society manages its resources. Economists examine the
basics of the economy, inclusive of mitigating factors such as income, unemployment, and
average costs, to determine if an economy is efficient. An efficient economy is one in which
society reaps the greatest reward from its resources (Mankiw, 2015).
Demand Curve, Supply Curve & Equilibrium
The demand curve is a measurement which showcases the demand for an item based on the cost.
Alternatively, the supply curve is a unit of measure which highlights the shifts in a demand based

3. 3
on costs. Often, the supply curve is referenced regarding its elasticity comparative to the
demand (relative to cost).
The demand curve shifts downward as the costs rise and the supply curve shifts upward.
This represents a greater demand for the item sold at a higher price. However, when supply and
demand intersect at cohesive levels, this is known as the equilibrium (Heakal, N.D.). To expand,
this means that the levels required by the buyers and the levels supplied by the manufacturers (or
suppliers) are level. This equilibrium results in an always in stock, level pricing scale.
Price Controls, Taxes & Elasticity in Pricing
Price controls, also known as price restrictions set forth by the government. Price floors
consist of price ceilings and price floors. Price ceilings are the maximum price at which a good
or service can be sold. Alternatively, price floors are the lowest point (or minimum price) a good
or service can be sold (Vancouver Community College Learning Centre, 2013).
Price ceilings are only effective when they in effect below the equilibrium price. When
the ceiling is in force, the quantity demanded is greater than the amount supplied. A price floor
is only useful when they are set above the equilibrium price as they result in a demand being less
than the quantity supplied, creating an overstock or surplus of the item (Vancouver Community
College Learning Centre, 2013).
Taxes have an effect on the supply (and demand) curve. When a supply is perfectly
inelastic (vertical), changes in price have no effect on quantity supplied or demanded. A
perfectly horizontal curve will reduce the demand for a particular item to the point of near
extinction.
A demonstration of this can be illustrated viewing tourists from the United Kingdom to a
large metropolis. Here in New York, visitors purchase extra suitcases and visit our designer
clearance stores such as Century 21 where they buy mass quantities of items to take back with

4. 4
them. This bulk shopping trip is incentivized through the tax base here is lower than it is in the
U.K. Additionally, the exchange rate for their pound to our dollar (pre Brexit) is superior so
their value for every dollar spent is lower. These incentives drive the consumer to buy more,
even though items may be at a higher price than similar items lacking the designer distinction.
Conclusion
While several factors affect the supply and demand curves, consumers ultimately make
their decisions for purchases based on tastes and reputation of the quality of goods.
Manufacturers plan for big sales but cannot always count on the moods of the market.
Consider the Apple Watch. A recent report showed that large quantities of this device went
unsold despite research and speculation.
In the end, the better the price and lower the tax, the more likely an item is to sell.
Market conditions such as income of the buyer, taxes and price of the item ultimately drive
consumer spending. Market floors and ceilings are put in place to safeguard price controls from
the government on certain items as well.

5. 5
References
Heakal, R. (N.D.). Economic Basics: Supply & Demand. Retrieved from Investopedia:
http://www.investopedia.com/university/economics/economics3.asp?
ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
Mankiw, N. G. (2015). Principles of Microeconomics. Stamford, CT: Cengage Learning.
Retrieved from
https://phoenix.vitalsource.com/#/books/9781305892811/cfi/6/10!/4/44@0:0.00
N.A. (N.D.). What is Economic Equilibrium. Retrieved from Investopedia:
http://www.investopedia.com/terms/e/economic-equilibrium.asp
Vancouver Community College Learning Centre. (2013). Microeconomics: Price Controls &
Taxes. Retrieved from Vancouver Community College:
http://library.vcc.ca/learningcentre/pdf/vcclc/Econ-06-PriceControlsandTaxes.pdf

6. 5
References
Heakal, R. (N.D.). Economic Basics: Supply & Demand. Retrieved from Investopedia:
http://www.investopedia.com/university/economics/economics3.asp?
ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
Mankiw, N. G. (2015). Principles of Microeconomics. Stamford, CT: Cengage Learning.
Retrieved from
https://phoenix.vitalsource.com/#/books/9781305892811/cfi/6/10!/4/44@0:0.00
N.A. (N.D.). What is Economic Equilibrium. Retrieved from Investopedia:
http://www.investopedia.com/terms/e/economic-equilibrium.asp
Vancouver Community College Learning Centre. (2013). Microeconomics: Price Controls &
Taxes. Retrieved from Vancouver Community College:
http://library.vcc.ca/learningcentre/pdf/vcclc/Econ-06-PriceControlsandTaxes.pdf