1.1 Introduction Big Ideas

Economics is the study of

choice with constraints.

An Economy chooses

to employ resources, to produce goods and services, to distribute them

Scarcity

A good, service, or resource is scarce if there is less of it freely available from nature than people want. (EX. petroleum, lumber, intelligence)

Economics

is the study of how people use limited resources to satisfy their desires.

Good

is a tangible object that satisfies your desires. (iPad, shoes, textbook)

Service

 is intangible, but it satisfies your desires. (lecture, haircut, TV show)

Resource

 is anything that can be used directly or indirectly to produce goods and services. (land, labor, capital, natural resources)

#1 Choices are necessary, and people face

tradeoffs

Resources are scarce

the quantity available is not large enough to satisfy all productive uses. ( To get one thing, we usually have to give up another thing).

Food vs. Clothing

leisure time vs. work

Equity vs. Efficiency

#2 The real cost of an item is its

opportunity cost

opportunity cost

is what you must give up in order to get something (also sometimes it is defined as the value of the next best alternative). Is crucial to understanding individual choice.

Opportunity cost contains two parts

monetary value and time value

#3 How much is a decision at the

margin

Marginal Decision

a decision made at the margin of an activity about whether to do a bit more or a bit less of an activity- studying for one more hour.

#4 People respond to

incentives

Incentive

 anything that offers rewards to people who change their behavior.

#5 Trade can make everyone …

better off

Trade

 individuals provide goods and services to others and receive goods and services in return

Gains from trade

• People can get more of what they want through trade than they could if they tried to be self-sufficient.

• When each person specializes in the task that he or she is good at performing.

#6 Markets move toward

Equilibrium

Market Economy

is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. 

Equilibrium

 an economic situation in which no individual would be better off doing something different. Because people respond to incentives, markets move toward equilibrium. Anytime there is a change, the economy will move to a new one.

#7 resources should be used ____ to achieve society’s goals

efficiently

Pareto Efficient

There is no way to make some people better off without making at least one individual worse off. (Resources are not wasted, not Pareto efficient if resources are unused). 

Efficiency

 Taking all opportunities to make some people better off without making other people worse off.

Equity

A condition in which everyone gets his or her “fair share.”

#8 Invisible Hand, Markets usually lead to efficiency under

good institutions

Invisible hand

works through the price system.

• The interaction of buyers and sellers determines prices

• Each price reflects the good’s value to buyers and the cost of producing the good.

• Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being.

#9 Government Intervention for Society's Welfare. ______ can sometimes improve market outcomes.

Governments

Sometimes ____ and need correction

markets fail

Externalities

Individual actions have side effects not taken into account by the market

Market Power

One party prevents mutually beneficial trades from occurring in an attempt to capture a greater share of resources for itself

Public Goods

Some goods cannot be efficiently managed by markets