Chapter 1 - Ten Principles of
Economics
Tags
Introduction
What is scarcity?
Society has limited resources and there cannot produce all the goods and
services people wish to have
What is economics?
The study of how society manages its scarce resources
Who are economists? What do they do?
They study how people make decisions: how much they work, what they
buy, how much they save, and how they invest their savings
They study how people interact with one another regarding buyers and
sellers of a specific product or service to determine pricing, quantity, etc.
They analyze the forces and trends that affect the economy as a whole
Growth in average income
Fraction of the population that cannot find work
Rate at which prices are rising
1.1 - How People Make Decisions (First 4 Principles)
What is the first principle of economics?
Principle 1: People Face Trade-Offs
What are 2 common trade-off examples in modern society?
Clean environment vs. high level of income
Chapter 1 - Ten Principles of Economics 1
, Efficiency and equality
What is efficiency?
The property of society getting the maximum benefits from its
scarce resources
What is equality?
The property of distributing economic prosperity uniformly among
the members of society
What happens when equality is valued over efficiency?
Too many slices of the economic pie are cut, the pie ends up
shrinking
i.e. the rich lose more than the poor, makes the rich work less, less
money overall
What is the second principle of economics?
Principle 2: The Cost of Something Is What You Give Up to Get It
What is most often the largest cost of college students' educations?
The earnings they give up to attend school (TIME!)
What is an opportunity cost?
Whatever must be given up to obtain some item
What is the third principle of economics?
Principle 3: Rational People Think at the Margin
Who are rational people?
People who systematically and purposefully do the best they can
to achieve their objectives
What is marginal change?
A small incremental adjustment to a plan of action
How do rational people make decisions?
By comparing marginal benefits and marginal costs
Chapter 1 - Ten Principles of Economics 2
, Take action if and only if the action's marginal benefit exceeds its
marginals cost
Why is water so cheap, while diamonds are so expensive?
A person's willingness to pay for a good is based on the marginal
benefit that an extra unit of the good would yield
The marginal benefit depends on how many units a person
already has
What is the fourth principle of economics?
Principle 4: People Respond to Incentives
What is an incentive?
Something that induces a person to act, such as the prospect of a
punishment or reward
What are the incentives of a price increase of a product?
Incentive for buyers (consumers) to consume less
Incentive for sellers (producers) to produce more
What did Sam Peltzman's 1975 study regard and find?
How auto-safety laws affected the dangerousness of driving and
pedestrian and driver deaths
Found that auto-safety laws didn't really affect driver deaths, but
increased pedestrian deaths and the number of accidents
Overall increased pedestrian deaths
Summary Questions
What is economics?
How society manages its scarce resources
What is your opportunity cost of going to a movie?
Chapter 1 - Ten Principles of Economics 3
, The total cash expenditure needed to go to the movie plus the value of
your time
What is a marginal change?
Incrementally alters an existing plan
What are the outcomes of people responding to incentives?
Policymakers can alter outcomes by changing punishments or rewards
Policies can have unintended consequences
Society faces a trade-off between efficiency and equality
1.2 - How People Interact (Next 3 Principles: 5-7)
What is the fifth principle of economics?
Principle 5: Trade Can Make Everyone Better Off
Do trades always have winners and losers?
No, trade between two entities can make each other better off
What are some benefits of trade?
Allows people/countries to specialize in the activities they do best
Allows people/countries to buy a greater variety of goods and
services at a lower cost
What is the sixth principle of economics?
Principle 6: Markets Are Usually a Good Way to Organize Economic
Activity
How did communist countries operate? Did it work?
On the premise that government officials were in the best position
to allocate the economy's scarce resources
Did not work, most formally communist countries have abandoned
the system and instead have adopted market economies
Chapter 1 - Ten Principles of Economics 4
Economics
Tags
Introduction
What is scarcity?
Society has limited resources and there cannot produce all the goods and
services people wish to have
What is economics?
The study of how society manages its scarce resources
Who are economists? What do they do?
They study how people make decisions: how much they work, what they
buy, how much they save, and how they invest their savings
They study how people interact with one another regarding buyers and
sellers of a specific product or service to determine pricing, quantity, etc.
They analyze the forces and trends that affect the economy as a whole
Growth in average income
Fraction of the population that cannot find work
Rate at which prices are rising
1.1 - How People Make Decisions (First 4 Principles)
What is the first principle of economics?
Principle 1: People Face Trade-Offs
What are 2 common trade-off examples in modern society?
Clean environment vs. high level of income
Chapter 1 - Ten Principles of Economics 1
, Efficiency and equality
What is efficiency?
The property of society getting the maximum benefits from its
scarce resources
What is equality?
The property of distributing economic prosperity uniformly among
the members of society
What happens when equality is valued over efficiency?
Too many slices of the economic pie are cut, the pie ends up
shrinking
i.e. the rich lose more than the poor, makes the rich work less, less
money overall
What is the second principle of economics?
Principle 2: The Cost of Something Is What You Give Up to Get It
What is most often the largest cost of college students' educations?
The earnings they give up to attend school (TIME!)
What is an opportunity cost?
Whatever must be given up to obtain some item
What is the third principle of economics?
Principle 3: Rational People Think at the Margin
Who are rational people?
People who systematically and purposefully do the best they can
to achieve their objectives
What is marginal change?
A small incremental adjustment to a plan of action
How do rational people make decisions?
By comparing marginal benefits and marginal costs
Chapter 1 - Ten Principles of Economics 2
, Take action if and only if the action's marginal benefit exceeds its
marginals cost
Why is water so cheap, while diamonds are so expensive?
A person's willingness to pay for a good is based on the marginal
benefit that an extra unit of the good would yield
The marginal benefit depends on how many units a person
already has
What is the fourth principle of economics?
Principle 4: People Respond to Incentives
What is an incentive?
Something that induces a person to act, such as the prospect of a
punishment or reward
What are the incentives of a price increase of a product?
Incentive for buyers (consumers) to consume less
Incentive for sellers (producers) to produce more
What did Sam Peltzman's 1975 study regard and find?
How auto-safety laws affected the dangerousness of driving and
pedestrian and driver deaths
Found that auto-safety laws didn't really affect driver deaths, but
increased pedestrian deaths and the number of accidents
Overall increased pedestrian deaths
Summary Questions
What is economics?
How society manages its scarce resources
What is your opportunity cost of going to a movie?
Chapter 1 - Ten Principles of Economics 3
, The total cash expenditure needed to go to the movie plus the value of
your time
What is a marginal change?
Incrementally alters an existing plan
What are the outcomes of people responding to incentives?
Policymakers can alter outcomes by changing punishments or rewards
Policies can have unintended consequences
Society faces a trade-off between efficiency and equality
1.2 - How People Interact (Next 3 Principles: 5-7)
What is the fifth principle of economics?
Principle 5: Trade Can Make Everyone Better Off
Do trades always have winners and losers?
No, trade between two entities can make each other better off
What are some benefits of trade?
Allows people/countries to specialize in the activities they do best
Allows people/countries to buy a greater variety of goods and
services at a lower cost
What is the sixth principle of economics?
Principle 6: Markets Are Usually a Good Way to Organize Economic
Activity
How did communist countries operate? Did it work?
On the premise that government officials were in the best position
to allocate the economy's scarce resources
Did not work, most formally communist countries have abandoned
the system and instead have adopted market economies
Chapter 1 - Ten Principles of Economics 4
