HOW TO PASS D089 Principles of Economics STUDY
GUIDE NOTES + 70 EXAM QUESTIONS AND
ANSWERS LAST PAGES 2025 NEW VERSION
Western Governors University
D089 Principles of Economics Notes
Unit 1: Introduction
Unit 2: The Economic Way of Thinking
Module 1: The Economic Way of
Thinking Module 2: The Economic
Problem
Unit 3: Microeconomics
Module 3: Supply, Demand, and
Elasticity Module 4: EfÏcient and
InefÏcient Markets Module 5:
, Production and Costs
Module 6: Market
Structures Unit 4:
Macroeconomics
Module 7: Macroeconomics Measurements and
Theories Module 8: Economic Growth and Fluctuations
Module 9: Stabilization Policies
Module 10: Open Markets
Book Notes
Module 1: The Economic Way of Thinking
• Economics
o The study of how humans make decisions in the face of scarcity
o Social science that describes how goods and
services are produced, distributed, and consumed
o Divided into two key areas:
▪ Macroeconomics
, • Focuses on large economic systems such as
national and global economics
• Branch of economics dealing with the
performance, structure, behavior, and decision
making of an economy as a whole
▪ Microeconomics
• Deals with businesses and individuals
• Branch of economics that studies the behavior of
individuals and firms in making decisions
regarding the allocation of scarce resources
and the interactions among these individuals
and firms
• Factors of production
o Describes the inputs used in the production of goods or
services to make an economic profit
• Scarcity
o The basic economic problem, the gap between limited,
scare, resources and theoretically limitless wants
• Every economic system must be able to answer the three basic
economic questions:
o What to produce
▪ Using the economy’s scarce resources to produce
one thing requires giving up another.
▪ Producing better education may require decreasing
other services, such as healthcare
o How it will be produced
▪ There are all sorts of choices to be made in
determining how goods and services should be
produced
▪ Should a firm employ a few skilled workers or a lot?
Should it produce in its own country or foreign plants?
o Whom the goods or services are produced
▪ If a good or service is produced, a decision must be
made about who will get it. A decision to have one
person or group receive a good or service usually
mans the good or service will not be available to
someone else
▪ Representatives of the poorest nations on earth often
complain that the energy consumption per person in
the US is 17 times greater than in the poorest
countries. Critics argue that the world’s energy should
be more evenly allocated. Should it?
• 10 principles of economics:
, o Everyone faces tradeoffs
o The cost of something is determined by what someone
gives up to get it
o Rational people think at the margin
o People respond to incentives
o Trade can benefit everyone
o Markets are a sound method of organizing economic activity
o Governments may be able to improve market outcomes
o The standard of living for a nation is determined by its
ability to produce goods and services
o Printing too much money causes prices to rise
o Society faces a short-run trade-off between inflation
an d unemployment
• HOW people make decisions and the principles associated
o Principle 1: everyone faces tradeoffs
▪ People must decide what they are willing to give up
to get what they need or want
▪ A person needs a car. She may want a brand new
expensive car, but her income is limited. She could
buy a less expensive car and have more money
left to meet her other wants or needs
o Principle 2: the cost of something is determined by what you
give up to get it
▪ Opportunity cost is the value of the next best alternative.
The cost of one item is the lost opportunity to do or
consume something else
▪ With the previous example consider when buying the new
car, the person will give up other goods or services
that she would have bought with that money if she
had not purchased the car
o Principle 3: rational people think at the margin
▪ In most cases, people make better decisions when
they consider if the additional benefit they gain from
one more unit is greater than the additional cost of
that extra unit of a good or service
▪ Suppose you have studied for one hour and are
considering if you should study for another hour. In
making that decision, you would consider the benefit
you would get from studying for one more hour (a
higher test grade)
GUIDE NOTES + 70 EXAM QUESTIONS AND
ANSWERS LAST PAGES 2025 NEW VERSION
Western Governors University
D089 Principles of Economics Notes
Unit 1: Introduction
Unit 2: The Economic Way of Thinking
Module 1: The Economic Way of
Thinking Module 2: The Economic
Problem
Unit 3: Microeconomics
Module 3: Supply, Demand, and
Elasticity Module 4: EfÏcient and
InefÏcient Markets Module 5:
, Production and Costs
Module 6: Market
Structures Unit 4:
Macroeconomics
Module 7: Macroeconomics Measurements and
Theories Module 8: Economic Growth and Fluctuations
Module 9: Stabilization Policies
Module 10: Open Markets
Book Notes
Module 1: The Economic Way of Thinking
• Economics
o The study of how humans make decisions in the face of scarcity
o Social science that describes how goods and
services are produced, distributed, and consumed
o Divided into two key areas:
▪ Macroeconomics
, • Focuses on large economic systems such as
national and global economics
• Branch of economics dealing with the
performance, structure, behavior, and decision
making of an economy as a whole
▪ Microeconomics
• Deals with businesses and individuals
• Branch of economics that studies the behavior of
individuals and firms in making decisions
regarding the allocation of scarce resources
and the interactions among these individuals
and firms
• Factors of production
o Describes the inputs used in the production of goods or
services to make an economic profit
• Scarcity
o The basic economic problem, the gap between limited,
scare, resources and theoretically limitless wants
• Every economic system must be able to answer the three basic
economic questions:
o What to produce
▪ Using the economy’s scarce resources to produce
one thing requires giving up another.
▪ Producing better education may require decreasing
other services, such as healthcare
o How it will be produced
▪ There are all sorts of choices to be made in
determining how goods and services should be
produced
▪ Should a firm employ a few skilled workers or a lot?
Should it produce in its own country or foreign plants?
o Whom the goods or services are produced
▪ If a good or service is produced, a decision must be
made about who will get it. A decision to have one
person or group receive a good or service usually
mans the good or service will not be available to
someone else
▪ Representatives of the poorest nations on earth often
complain that the energy consumption per person in
the US is 17 times greater than in the poorest
countries. Critics argue that the world’s energy should
be more evenly allocated. Should it?
• 10 principles of economics:
, o Everyone faces tradeoffs
o The cost of something is determined by what someone
gives up to get it
o Rational people think at the margin
o People respond to incentives
o Trade can benefit everyone
o Markets are a sound method of organizing economic activity
o Governments may be able to improve market outcomes
o The standard of living for a nation is determined by its
ability to produce goods and services
o Printing too much money causes prices to rise
o Society faces a short-run trade-off between inflation
an d unemployment
• HOW people make decisions and the principles associated
o Principle 1: everyone faces tradeoffs
▪ People must decide what they are willing to give up
to get what they need or want
▪ A person needs a car. She may want a brand new
expensive car, but her income is limited. She could
buy a less expensive car and have more money
left to meet her other wants or needs
o Principle 2: the cost of something is determined by what you
give up to get it
▪ Opportunity cost is the value of the next best alternative.
The cost of one item is the lost opportunity to do or
consume something else
▪ With the previous example consider when buying the new
car, the person will give up other goods or services
that she would have bought with that money if she
had not purchased the car
o Principle 3: rational people think at the margin
▪ In most cases, people make better decisions when
they consider if the additional benefit they gain from
one more unit is greater than the additional cost of
that extra unit of a good or service
▪ Suppose you have studied for one hour and are
considering if you should study for another hour. In
making that decision, you would consider the benefit
you would get from studying for one more hour (a
higher test grade)
