Chapter 1 Principles of Economics
Principle One: People face trade offs
What are tradeoffs?
● Students have to manage their time and make decisions
● Parents face tradeoffs when it comes to spending income
Principle Two: The cost of something is what you give up to get it
● What must be done to obtain some item
● Involves comparing costs, benefits, and alternatives
● Opportunity costs
Principle Three: Rational People think at the Margin
● A rational decision maker compares marginal benefits and marginal costs
● They take action if their marginal benefits > marginal cost
Principle Four: People respond to Incentives
● An incentive is something that encourages one to do something
● Prices and public policy encourages people in different ways
Principle Five: Trade can make everyone better off
● Trade allows people to specialize in what they do best
● For example: $5 in exchange for mowing the lawn
● A greater variety of goods and services
Principle Six: Markets are good way to organize the economy
● The market economy is an allocation of resources
● The market is guided by prices and self interest
● Corollary is government intervention with an idea or a proposition
Principle Seven: Governments can sometimes improve market outcomes
● We need the government to enforce rules, property rights, avoid market failure, and
promote equality.
● Property rights is the ability of an individual to own and exercise control over scarce
resources
Principle Eight: A country's standard of living depends on its ability to produce goods and services
● Different countries produces different amounts of goods at different values.
● Different countries make different incomes
Principle Nine: Prices rise when the government prints too much money
● This is known as inflation or an overall increase in level of prices in the economy.
, Principle Ten: Society faces a short-run tradeoff between inflation and Unemployment
● Short run effects of monetary injections, during a short period of time, stimulates the level
of spending and the demand of goods and services.
● Causes lower unemployment, meaning more people get hired
Chapter 2 Thinking like an Economist
Economist thinking as a Scientist
● Microeconomics is the study of how households and firms make decisions and how they
interact in markets. Therefore, microeconomists are more likely to create models to analyze
the decisions of firms (such as pricing) and those of consumers (such as shopping choices),
as well as how government policies affect those decisions.
● Macroeconomics is the study of factors that affect the entire economy. Therefore,
macroeconomists tend to create models to analyze how aggregate phenomena such as
growth, inflation, and unemployment respond to policy decisions of governments and
central banks, changes in aggregate spending or savings, and supply or demand shocks.
● Economists are scientists because they devise theories, collect data, analyze data, and use
scientific method.
● Scientific method is development of testing theories about how the world works by asking
questions.
● Conducting experiments is impractical but do exists
● Economic theories make assumptions by simplifying the complex world so it's easier to
understand
● The art of scientific making is deciding what assumptions to make.
● Economic models such as diagrams and equations help us understand reality to improve our
understanding of it
The Economist as Policy Adviser
● Positive statements are descriptive and attempt to describe the world as it is.
"Minimum-wage causes unemployment" (fact)
● Normative statement are perspective and attempt to prescribe how the world should be.
"the government should raise minimum wage" (opinion)
● Economists titles : Federal reserve, dept of treasury, dept of justice, budget office ect.
Why Economists Disagree
● They have different positive theories about how the world works and different opinions
about policies
● Differences in scientific judgements, values, perception vs reality
Principle One: People face trade offs
What are tradeoffs?
● Students have to manage their time and make decisions
● Parents face tradeoffs when it comes to spending income
Principle Two: The cost of something is what you give up to get it
● What must be done to obtain some item
● Involves comparing costs, benefits, and alternatives
● Opportunity costs
Principle Three: Rational People think at the Margin
● A rational decision maker compares marginal benefits and marginal costs
● They take action if their marginal benefits > marginal cost
Principle Four: People respond to Incentives
● An incentive is something that encourages one to do something
● Prices and public policy encourages people in different ways
Principle Five: Trade can make everyone better off
● Trade allows people to specialize in what they do best
● For example: $5 in exchange for mowing the lawn
● A greater variety of goods and services
Principle Six: Markets are good way to organize the economy
● The market economy is an allocation of resources
● The market is guided by prices and self interest
● Corollary is government intervention with an idea or a proposition
Principle Seven: Governments can sometimes improve market outcomes
● We need the government to enforce rules, property rights, avoid market failure, and
promote equality.
● Property rights is the ability of an individual to own and exercise control over scarce
resources
Principle Eight: A country's standard of living depends on its ability to produce goods and services
● Different countries produces different amounts of goods at different values.
● Different countries make different incomes
Principle Nine: Prices rise when the government prints too much money
● This is known as inflation or an overall increase in level of prices in the economy.
, Principle Ten: Society faces a short-run tradeoff between inflation and Unemployment
● Short run effects of monetary injections, during a short period of time, stimulates the level
of spending and the demand of goods and services.
● Causes lower unemployment, meaning more people get hired
Chapter 2 Thinking like an Economist
Economist thinking as a Scientist
● Microeconomics is the study of how households and firms make decisions and how they
interact in markets. Therefore, microeconomists are more likely to create models to analyze
the decisions of firms (such as pricing) and those of consumers (such as shopping choices),
as well as how government policies affect those decisions.
● Macroeconomics is the study of factors that affect the entire economy. Therefore,
macroeconomists tend to create models to analyze how aggregate phenomena such as
growth, inflation, and unemployment respond to policy decisions of governments and
central banks, changes in aggregate spending or savings, and supply or demand shocks.
● Economists are scientists because they devise theories, collect data, analyze data, and use
scientific method.
● Scientific method is development of testing theories about how the world works by asking
questions.
● Conducting experiments is impractical but do exists
● Economic theories make assumptions by simplifying the complex world so it's easier to
understand
● The art of scientific making is deciding what assumptions to make.
● Economic models such as diagrams and equations help us understand reality to improve our
understanding of it
The Economist as Policy Adviser
● Positive statements are descriptive and attempt to describe the world as it is.
"Minimum-wage causes unemployment" (fact)
● Normative statement are perspective and attempt to prescribe how the world should be.
"the government should raise minimum wage" (opinion)
● Economists titles : Federal reserve, dept of treasury, dept of justice, budget office ect.
Why Economists Disagree
● They have different positive theories about how the world works and different opinions
about policies
● Differences in scientific judgements, values, perception vs reality
