Module 1, Chapters 1 & 2

Scarcity:

The limited nature of society’s resources

Economics

The study of how society manages its scarce resources

Microeconomics

is the study of how households and firms make decisions and how they interact in markets

Macroeconomics

Is the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Economics

is a way of understanding how people make
decisions.

economic model

is a simplification of the real world

PRINCIPLE #1

People Face Tradeoffs. All decisions involve tradeoffs. Efficiency vs. Equality

Efficiency

when society gets the most from its scarce resources

Equality:

when prosperity is distributed uniformly among society’s
members

PRINCIPLE #2

The Cost of Something Is What You Give Up to Get It. Opportunity cost

Opportunity Cost

is whatever must be given up to obtain an item

PRINCIPLE #3

Rational People Think at the Margin

Rational people

systematically and purposefully do the best they can to
achieve their objectives. They make decisions by evaluating costs and
benefits of marginal changes, incremental adjustments to an existing plan.

RINCIPLE #4

People Respond to Incentives

Incentive:

something that induces a person to act, i.e. the prospect of a
reward or punishment.

PRINCIPLE #5

Trade Can Make Everyone Better Off

PRINCIPLE #6

Markets Are Usually A Good Way to
Organize Economic Activity. Market & Market Economy

Market

a group of buyers and sellers

market economy

allocates resources through the decentralized
decisions of many households and firms as they interact in markets

PRINCIPLE #7

Governments Can Sometimes Improve
Market Outcomes. property rights, market failures (externalities, market power), Equity.

The Production Possibilities Frontier (PPF)

a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

positive statements

describe the world as it is (fact)

normative statements

prescribe how the world should be (opinion)