Ch1: Ten Principles of Economics
,Scarcity: limited resources in society
Economics: study of how society mangages its scarce resources
1-1 How People Make Decisions
- People Face Tradeoffs:
- It could be time, money, attention
- Efficiency (society getting the best from scarce resources) vs. Equality (benefits
are distributed uniformly among society’s members
- The Cost of Something is What You Give Up to Get It
- Opportunity cost: whatever must be given up to obtain some item
- Rational People Think at the Margin
- Rational People: people who systematically and purposefully do the best they
can to achieve their objectives
- Marginal Change: an incremental adjustment to a plan of action
- Rational people compare marginal benefits and marginal costs; they will only
take an action if the marginal benefit outweighs the marginal cost
- As long as the consumer pays more than the marginal cost, then a product is
profitable
- People Respond to Incentives
- Incentive: something that induces a person to act
- If policies alter incentives, people may change behavior
1-2 How People Interact
- Trade Can Make Everyone Better Off
- Allows for specialization, which in turn lower costs
- Markets Are Usually a Good Way to Organize Economic Activity
- Central planning used to be a prevalent way to run economy, but did not work
- Market Economy: an economy that allocates resources through the
decentralized decisions of many firms and households as they interact in markets
for goods and services
- Prices and self-interests guide decisions here
- An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith
- Firms and households in competitive markets act as if they are guided by
an “invisible hand”
- When a government prevents prices from adjusting to supply and demand, it
impedes the invisible hand’s ability to coordinate the decisions of the firms and
households that make up an economy
- Taxes will distort prices and decisions of households and firms
- Governments Can Sometimes Improve Market Outcomes
- Property Rights: the ability of an individual to own and exercise control over
scarce resources
- Government can also interfere to change the allocation of resources to promote
efficiency or equality
- Market Failure: a situation in which a market left on its own does not allocate
resources efficiently
- Externality: the impact of one person’s actions on the well-being of a bystander
, - Market Power: the ability of a single economic actor (or small group of actors) to
have a substantial influence on market prices
- In the presence of externalities or market power, well-designed public policy can
enhance efficiency
- In practice, many public policies, such as the income tax and the welfare system,
aim to achieve a more equal distribution of well-being
1-3 How the Economy as a Whole Works
- A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
- People in high-income countries have more computers, more cars, better
nutrition, better healthcare, and a longer life expectancy than do those in low-
income countries
- Changes in living standards also happen dramatically over time
- Productivity: the quantity of goods and services produced from each unit of
labor input
- Prices Rise When the Government Prints Too Much Money
- Inflation: an increase in the overall level of prices in the economy
- Society Faces a Short-Run Trade-Off between Inflation and Unemployment
- Short run money effects:
- Increasing the amount of money in the economy stimulates the
overall level of spending and thus the demand for goods and
services.
- Higher demand will, over time, cause firms to raise their prices,
but in the meantime, it encourages them to hire more workers
and produce a larger quantity of goods and services.
- More hiring means lower unemployment.
- Business Cycle: fluctuations in economic activity, such as
employment and productions
, Ch3: Interdependence and Gains from
Trade
,Scarcity: limited resources in society
Economics: study of how society mangages its scarce resources
1-1 How People Make Decisions
- People Face Tradeoffs:
- It could be time, money, attention
- Efficiency (society getting the best from scarce resources) vs. Equality (benefits
are distributed uniformly among society’s members
- The Cost of Something is What You Give Up to Get It
- Opportunity cost: whatever must be given up to obtain some item
- Rational People Think at the Margin
- Rational People: people who systematically and purposefully do the best they
can to achieve their objectives
- Marginal Change: an incremental adjustment to a plan of action
- Rational people compare marginal benefits and marginal costs; they will only
take an action if the marginal benefit outweighs the marginal cost
- As long as the consumer pays more than the marginal cost, then a product is
profitable
- People Respond to Incentives
- Incentive: something that induces a person to act
- If policies alter incentives, people may change behavior
1-2 How People Interact
- Trade Can Make Everyone Better Off
- Allows for specialization, which in turn lower costs
- Markets Are Usually a Good Way to Organize Economic Activity
- Central planning used to be a prevalent way to run economy, but did not work
- Market Economy: an economy that allocates resources through the
decentralized decisions of many firms and households as they interact in markets
for goods and services
- Prices and self-interests guide decisions here
- An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith
- Firms and households in competitive markets act as if they are guided by
an “invisible hand”
- When a government prevents prices from adjusting to supply and demand, it
impedes the invisible hand’s ability to coordinate the decisions of the firms and
households that make up an economy
- Taxes will distort prices and decisions of households and firms
- Governments Can Sometimes Improve Market Outcomes
- Property Rights: the ability of an individual to own and exercise control over
scarce resources
- Government can also interfere to change the allocation of resources to promote
efficiency or equality
- Market Failure: a situation in which a market left on its own does not allocate
resources efficiently
- Externality: the impact of one person’s actions on the well-being of a bystander
, - Market Power: the ability of a single economic actor (or small group of actors) to
have a substantial influence on market prices
- In the presence of externalities or market power, well-designed public policy can
enhance efficiency
- In practice, many public policies, such as the income tax and the welfare system,
aim to achieve a more equal distribution of well-being
1-3 How the Economy as a Whole Works
- A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
- People in high-income countries have more computers, more cars, better
nutrition, better healthcare, and a longer life expectancy than do those in low-
income countries
- Changes in living standards also happen dramatically over time
- Productivity: the quantity of goods and services produced from each unit of
labor input
- Prices Rise When the Government Prints Too Much Money
- Inflation: an increase in the overall level of prices in the economy
- Society Faces a Short-Run Trade-Off between Inflation and Unemployment
- Short run money effects:
- Increasing the amount of money in the economy stimulates the
overall level of spending and thus the demand for goods and
services.
- Higher demand will, over time, cause firms to raise their prices,
but in the meantime, it encourages them to hire more workers
and produce a larger quantity of goods and services.
- More hiring means lower unemployment.
- Business Cycle: fluctuations in economic activity, such as
employment and productions
, Ch3: Interdependence and Gains from
Trade
