PE CHAPTER 1: TEN PRINCIPLES OF ECONOMICS

What are the 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 principles of economics revolve around how people make decisions

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

What principles of economics revolve around how people interact?

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

What principles of economics revolve around how economy as a whole?

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's the first principle of economics and what does it consist of?

People face trade offs
to get st we like, we usually have to give up st else that we also like

What are some examples of trade offs?

Time vs money
Sleep vs good grades
Guns vs butter (government spending)
Efficiency vs equity

Explain the trade off between efficiency

society is getting to maximum benefits from its scarce resources , size of economic pie

Explain the trade off between equality

distribute economic prosperity uniformly among the members of society, how the pie is divided into individual slices

where is the word ‘ economy ‘ come from, the original word

Greek, oiknonomos

do households and economics have much in common

Yes

the similarities of households and economics

a household faces many decisions, allocate scarce resource, pay attention to ability, effort, desire

society face many decisions, allocate resources and output

what is scarcity

the limited nature of society’s resources

why the supply of resources cannot meet human demands

Cause society has limited resources and cannot produce goods and services people wish to have.

what is economics

the study of how society manages its scarce resources

what economists study

how people make decisions ( work, buy, save, invest)

how people interact with one another

the forces and trends that affect the economy as a whole

the forces and trends that affect the economy as a whole

growth in average income

fraction ò the population cannot find work ( unemployment rate )

rate at which prices are rising ( inflation )

examples of Natural sources ,Human-Made Resources, Human Resources, Economic Resources

Natural sources air, water, minerals, forests, sunlight

Human-Made Resources buildings, roads, tools, technology Human Resources skills, labor, knowledge

Economic Resources money, finance, services

What does society face trade-offs

national defense and consumer goods

clean environment and high level of income

efficiency and equality

the proverb refers “ people face trade-offs “

there ain’t no such things as a free lunch

What is the second principle of economics and what does it consist of?

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

people face trade-offs, making decisions
opportunity cost

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

compare costs with benefits of alternatives

need to include opportunity costs

opportunity cost

whatever must be given up to obtain some items

What is the third principle of economics

Rational People think at the margin

what does it consist of? in third principles

rational people systematically and purposely do the best

marginal changes small incremental adjustment

rational decision market compare marginal benefits and marginal costs, take action only if

marginal benefits > marginal costs

When are marginal changes worth it?

When marginal benefit outweighs marginal cost

What is the fourth principle of economics

People respond to incentives

what does it consist of? in 4th principle

st that includes a person to act

higher price buyers consume less, sellers produce more

public policy: change costs, benefits, people’s behavior, maybe unintended consequences

What are examples of incentives and how people respond to them?

Cigarette tax + Pictures on boxes = People smoke less
The fear of imprisonment = Less crime

What is the fifth principle

Trade can make everyone better off

what does it consist of? in 5th principle

trade allows each person to specialize in the activities someone does best, enjoy a greater variety of goods and services, promotes competition and partnership at the same time

What is the sixth principle

Markets are usually a good way to organize economic activity

what does it consist of? sixth principle

communist countries

market economy, allocation of resources

market economics

communist countries ( command countries ) sixth principles

government officials are in the best position to allocate the economy’s scare resources

market economy sixth principle

that allocate resources through the decentralized decisions of many firms and households as they interact in markets for goods and services ,guided by prices and self interest, Adam Smith's "Invisible Hand"

market economics, sixth principle

no one is looking out for the economic society well-being as a whole

proven remarkably successful in economic activities to promote overall economic well-being. Adam Smith “ invisible hand “

What are the 3 forms to organize economic activity?

1Centrally planned Economies
2 Mixed Economies
3 Market Economies

What is the seventh principle

Government can sometimes improve market outcomes

what does it consist of? seventh principle

we need government

property rights

market failure

market failure P7

a situation in which a market left on its own fails to allocate resources efficiently

Governments needed for:

enforce rules, maintain institutions(key to market economy), and enforce property rights

What are property rights?

ability of a person to own and exercise control over scarce resources

What are the two forms of market failure that the government often intervenes with?

Externalities

market power

externality

the impact of one person's actions on the well-being of a bystander (cause for market failure)

market power

the ability of a single economic actor , or small group of actors, to have a substantial influence on market prices.

disparities in economic well-being P7

market economy rewards people

Government intervention :change allocation of resources to promote effeciency to avoid a market failure / promote equality of resources

What are types of market power?

Oligarchies, monopolies, monopsonies

Principle 8 of Economics

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

what does it consist of? 8th principle

large differences in living standards

productivity

productivity 8th principle

the quantity of goods and services produced from each unit of labor input

higher productivity 8th principle

higher standard of living

Growth rate of nation's productivity 8th principle

Determines growth rate of its average income

Principle 9 of economics

Prices rise when the government prints too much money

consists of P9

inflation

Causes for large or persistent inflation

inflation P9

an increase in the overall level of prices in the economy

Causes for large or persistent inflation P9

Growth in quantity of money
Value of money falls

Principle 10 of economics

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

consists in P10

short-run effects of monetary injections

Phillips Curve

business cycle

short-run effects of monetary injections P10

Stimulates the overall level of spending
Higher demand for goods and services
Firms - raise prices; hire more workers; produce more goods and services
Lower unemployment

Phillips Curve P10

a curve that shows the short-run trade-off between inflation and unemployment

business cycle P10

fluctuation in economic activity, such as employment and production