[PRINECON] MODULE 1: The Ten Principles of Economics

Oikonomos

Greek word of economy, the one who manages the household

Scarcity

The limited nature of society’s resources; All resources are scarce

Economics

The study of how society manages its scarce resources.

1. How people make decisions

2. How people interact with one another

3. The forces and trends that affect the economy as a whole

Economics study the following: (3)

Principle 1: People face trade-offs

Efficiency and Equality

Efficiency

The size of the economic pie

Equality

How the pie is divided into individual sizes.

Opportunity Cost

Whatever must be given up to obtain the item

Rational People

systematically and purposefully do the best they can to achieve their objectives.

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

Opportunity Cost

Marginal Changes

Small incremental adjustments to plan action

Rational Decision Maker

Make decisions by comparing marginal benefits and marginal costs

*(Marginal Benefits> Marginal Costs)

Principle 3: Rational People think at the margin

Rational People, Marginal Changes, Rational Decision Maker

Incentive

Something that induces a person to act.

Higher price

means that buyers consume less and sellers produce more.

Public Policy

Change costs or benefits, Change people’s behavior, Can have unintended consequences.

Principle 4: People respond to incentives

Incentive, Public Policy

Trade

allows each person to specialize in the activities he or she does best.

Market Economy

have proven remarkably successful in organizing economic activity to promote overall economic well-being.

o Market Economy, Central Planning

o Market Economy, Allocation of Resources

Market Economy: (2)

Surge Pricing

Increases the quantity of car services supplied when they are most needed. They allocate the services to those consumers who value them most highly.

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

Market Economy, Surge Pricing

Property Rights

ability of an individual to own and exercise control over scarce resources.

Market Failure

Situation in which the market left on its own fails to allocate resources efficiently

Externality

Impact of one person’s actions on the well being of a bystander.

Market Power

ability of a single economic actor to have a substantial influence on market prices.

1. Market Economy Rewards People

2. Government Intervention, Public Policies

Disparities in Economic Well Being (2)

Principle 7: Governments can sometimes improve market outcomes

Property Rights, Market Failure, Externality, Market Power

Principle 8: A country’s standard of living depends on its ability to produce goods and services

Large Differences in Living Standards because of Differences in Productivity

Productivity

Quantity of Goods and Services Produced from each unit of Labor Input.

Productivity

Higher _______ = Higher Standard of Living

Growth Rate of Nation’s Productivity

Determines growth rate of its average income

Inflation

an increase in the overall level of prices in the economy

Principle 9: Prices rise when the government prints too much money

Inflation