CHAPTER 1: TEN PRINCIPLES OF ECONOMICS
● economics is the study of how a society manages its scarce resources
● fundamental lessons about individual decision making
○ people face trade-offs among alternative goals
○ decisions are made by comparing costs and marginal benefits
○ ppl change bx in response to incentives
● fundamental lessons about interactions among ppl
○ trade and interdependence can be mutually beneficial
○ gov’t can improve market outcomes
● fundamental lessons abt the economy as a whole
○ productivity is the ultimate source of living standards
○ growth in the quantity of money → inflation
○ Society faces a short-run trade-off btwn inflation and unemployment
● 10 principles
○ how people make decisions
■ People face trade-offs
● I.e.: choosing btwn going to the cinema or working
■ Cost of smtn is what you give up to get it
● i.e.: during the time you were studying, attending classing you could have
earned money working
■ Rational ppl think at the margin
● I.e.: when a firm decides whether to produce an extra unit of some good, it
will always look at the cost
of producing 1 extra unit vs. the benefit
■ Ppl respond to incentives
● I.e.: gov’t imposes a higher tax on cigarettes → ppl would stop smoking
○ how people interact
■ Trade can make everyone better off
● people specialize in the things they are good at so that they can trade with one
another
● absolute advantage: ability to produce a good using fewer inputs than
another producer
● comparative advantage: ability to produce a good at a lower opportunity
cost than another producer
● gains from trade are based on comparative advantage because both parties will
benefit when they specialize in smt where both will consume more goods and
reach points outside the ppf
● graph: people face trade-offs btwn certain goods b/c their budget is limited so
only the points inside and on the production possibility frontier are attainable
however with trade, people will specialize and obtain points outside the curve.
, ● the producer who has the comparative advantage determines who specializes
in what product and when this takes place, total production in the economy
rises → making everybody better off
■ Markets are usually a good way to organize economic activity
■ Gov’ts can sometimes improve market outcomes
● laws → to stimulate economic activity
● Property rights: the ability of an individual to own and exercise control over
scarce resources
○ I.e.: singer wouldn’t produce any music if she knew everybody could
get an illegal copy of her music
○ How the economy as a whole works:
■ A country’s std of living depends on its ability to produce goods + services
● big diff btwn annual incomes for countries around the world
● I.e.: we can make a lot more w/ 1 unit of labour in Germany vs. Nigeria
■ Prices rise when the gov’t prints too much money
■ Society faces a short-run trade-off btwn inflation and unemployment
● Increasing the amt of money stimulates overall spending thus, demand for
goods+ services → higher demand may cause firms to raise prices but, also →
hire more workers → produce more goods +services = more hiring means
lower unemployment
CHAPTER 2: THINKING LIKE AN ECONOMIST
● circular-flow chart: reps the
organization of an economy; decisions
are made by households and firms →
○ they interact in the markets for
goods and services →
households are buyers and firms
are sellers
○ they also interact in the markets
for the factors of production →
firms are buyers and households
are sellers
, ● production possibilities curve: shows
combo of output (capital+consumer goods) that the
economoy can possibly produce. economy can
produce anything on (points C, A) or inside the
curve (B) but it’s considered inefficient since we
have the resources to produce more → maybe this is
due to widespread unemployment; points outside the
curve (D) are unattainable given the economy’s
resources but, w/ an increase in technological
progress → it can shift the ppf curve upwards → we
can produce according to D.
● Microeconomics: study of decisionmaking by households and the interaction among household and
firms in the marketplace
● Macroeconomics: the forces and trends that affect the economy as a whole
● normative statement: claims that attempt to describe how the world ought to be; economists as
policy advisers
○ I.e.: gov’t should raise the minimum wage
● positive statement: an assertion abt how the world is
○ I.e.: minimum-wage laws cause unemployment
● Key difference: how we judge their validity → we can confirm or refute positive statements by
examining evidence vs. normative statement involve our view on ethics, religion, political
philosophy
CHAPTER 3: THE MARKET FORCES OF SUPPLY AND DEMAND
● supply a nd demand → forces that make market economies work
○ buyers determine demand
○ sellers determine supply
○ demand curve is downward sloping and supply curve is upward sloping
● market: group of buyers and sellers of a particular good or service
● competitive market: many buyers and sellers, each has a negligible impact on the market
○ i.e: ice-cream market → sellers do not charge more/less b/c customers can easily find the
same ice cream elsewhere
○ perfectly competitive market characteristics:
■ goods offered for sale are exactly the same
■ many buyers and sellers such that no party has any influence on the price
● i.e: wheat market
● monopoly: 1 seller, and seller controls price
● economics is the study of how a society manages its scarce resources
● fundamental lessons about individual decision making
○ people face trade-offs among alternative goals
○ decisions are made by comparing costs and marginal benefits
○ ppl change bx in response to incentives
● fundamental lessons about interactions among ppl
○ trade and interdependence can be mutually beneficial
○ gov’t can improve market outcomes
● fundamental lessons abt the economy as a whole
○ productivity is the ultimate source of living standards
○ growth in the quantity of money → inflation
○ Society faces a short-run trade-off btwn inflation and unemployment
● 10 principles
○ how people make decisions
■ People face trade-offs
● I.e.: choosing btwn going to the cinema or working
■ Cost of smtn is what you give up to get it
● i.e.: during the time you were studying, attending classing you could have
earned money working
■ Rational ppl think at the margin
● I.e.: when a firm decides whether to produce an extra unit of some good, it
will always look at the cost
of producing 1 extra unit vs. the benefit
■ Ppl respond to incentives
● I.e.: gov’t imposes a higher tax on cigarettes → ppl would stop smoking
○ how people interact
■ Trade can make everyone better off
● people specialize in the things they are good at so that they can trade with one
another
● absolute advantage: ability to produce a good using fewer inputs than
another producer
● comparative advantage: ability to produce a good at a lower opportunity
cost than another producer
● gains from trade are based on comparative advantage because both parties will
benefit when they specialize in smt where both will consume more goods and
reach points outside the ppf
● graph: people face trade-offs btwn certain goods b/c their budget is limited so
only the points inside and on the production possibility frontier are attainable
however with trade, people will specialize and obtain points outside the curve.
, ● the producer who has the comparative advantage determines who specializes
in what product and when this takes place, total production in the economy
rises → making everybody better off
■ Markets are usually a good way to organize economic activity
■ Gov’ts can sometimes improve market outcomes
● laws → to stimulate economic activity
● Property rights: the ability of an individual to own and exercise control over
scarce resources
○ I.e.: singer wouldn’t produce any music if she knew everybody could
get an illegal copy of her music
○ How the economy as a whole works:
■ A country’s std of living depends on its ability to produce goods + services
● big diff btwn annual incomes for countries around the world
● I.e.: we can make a lot more w/ 1 unit of labour in Germany vs. Nigeria
■ Prices rise when the gov’t prints too much money
■ Society faces a short-run trade-off btwn inflation and unemployment
● Increasing the amt of money stimulates overall spending thus, demand for
goods+ services → higher demand may cause firms to raise prices but, also →
hire more workers → produce more goods +services = more hiring means
lower unemployment
CHAPTER 2: THINKING LIKE AN ECONOMIST
● circular-flow chart: reps the
organization of an economy; decisions
are made by households and firms →
○ they interact in the markets for
goods and services →
households are buyers and firms
are sellers
○ they also interact in the markets
for the factors of production →
firms are buyers and households
are sellers
, ● production possibilities curve: shows
combo of output (capital+consumer goods) that the
economoy can possibly produce. economy can
produce anything on (points C, A) or inside the
curve (B) but it’s considered inefficient since we
have the resources to produce more → maybe this is
due to widespread unemployment; points outside the
curve (D) are unattainable given the economy’s
resources but, w/ an increase in technological
progress → it can shift the ppf curve upwards → we
can produce according to D.
● Microeconomics: study of decisionmaking by households and the interaction among household and
firms in the marketplace
● Macroeconomics: the forces and trends that affect the economy as a whole
● normative statement: claims that attempt to describe how the world ought to be; economists as
policy advisers
○ I.e.: gov’t should raise the minimum wage
● positive statement: an assertion abt how the world is
○ I.e.: minimum-wage laws cause unemployment
● Key difference: how we judge their validity → we can confirm or refute positive statements by
examining evidence vs. normative statement involve our view on ethics, religion, political
philosophy
CHAPTER 3: THE MARKET FORCES OF SUPPLY AND DEMAND
● supply a nd demand → forces that make market economies work
○ buyers determine demand
○ sellers determine supply
○ demand curve is downward sloping and supply curve is upward sloping
● market: group of buyers and sellers of a particular good or service
● competitive market: many buyers and sellers, each has a negligible impact on the market
○ i.e: ice-cream market → sellers do not charge more/less b/c customers can easily find the
same ice cream elsewhere
○ perfectly competitive market characteristics:
■ goods offered for sale are exactly the same
■ many buyers and sellers such that no party has any influence on the price
● i.e: wheat market
● monopoly: 1 seller, and seller controls price
