Principles of Economics - Chapter 1-2

Scarcity

society has limited resources and therefore cannot produce all

the goods and services people wish to have.

Economics

the study of how society manages its scarce resources

4 Units of Measure in Economics

Household-consumers

firms-producers

government

international sector

what are the 3 areas that economists study?

how people make decisions (what they buy)

how people interact with one another (number of buyers and sellers determines price)

economists analyze the forces and trends that affect the economy as a whole

10 Principles of Economics

1. People face trade-offs

2. The cost of something is what you give up to get it

3. Rational people think at the margin

4. People respond to incentives

5. Trade can make everyone better off

6. Markets are usually a good way to organize economic activity

7. Governments can sometimes improve market outcomes

8. A country's standard of living depends on its ability to produce goods and services

9. Prices rise when the government prints too much money

10. Society faces a short-run trade-off between inflation and unemployment

what examples of trade-offs do societies face? (3)

Guns-and-butter (spending on national security vs. spending on consumer goods to improve standard of living)

Clean environment vs. profits

Efficiency vs. equality

Efficiency

concept that society is getting the maximum benefits from its scarce resources

Equality

the property of distributing economic prosperity uniformly among the members of society

Microeconomics

the study of how households and firms make decisions and how they interact in markets, not the gov't or int'l sector

Macroeconomics

The study of the economy as a whole, including households, firms, gov't and international sector

Is money a resource?

NO money is not a resource.

What are resources/factors of productions?

anything that helps you produce something else

cake analogy

ingredients, baker, mixing bowl, kitchen

Human Capital

the skills and knowledge gained by a worker through education and experience

3 resources

land, capital goods, and labor

land

includes ingredients, things that you will always need to replenish

capital goods

physical machinery - anything that has already been produced that helps you produce something else

production

take resources and transform them into final goods

opportunity cost

the most desirable alternative given up as the result of a decision

if you have $100, and you choose to spend $80 on a dress instead of $40 shoes, the opportunity cost of that dress is $40