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Scarcity
the limited nature of society's resources
economics
study of how society manages its scarce resources
economists study:
1. How people make decisions
2. How people interact with one another
3. Analyze forces and trends that affect the economy as a whole
Principle 1
People face "trade offs"
Making Decisions
trade off one goal against another. Example: a student can choose between sleep or going to class
Efficiency
1. Society getting the most it can from its scarce resources
2. Size of the Economic Pie
Equality
Distributing economic prosperity uniformly among the members of society (how the pie is divided)
Principle 2
The cost of something is what you give up to get it
People face trade offs
Make decisions (compare costs with benefits of alternatives)
Opportunity Cost
Whatever must be given up to obtain one item
Principle 3
Rational people think at the margin
Rational People
Systemically and Purposefully do their best to achieve their objectives
Marginal Changes
Small incremental adjustments to a plan of action
Marginal Benefits
Additional Benefits
Marginal Costs
Additional Costs
Rational Decision maker
Marginal Benefits>Marginal Costs
Principle 4
People respond to incentives
Incentive
Something that induces a person to act
Higher Price
Buyers will consume it less
Sellers will produce it more
Public Policy
1. Change Costs or benefits
2. change people's behavior
Principle 5
Trade can make everyone better off
Trade
1. Allows each person to specialize in the area they do best in
2. Enjoy more goods/services at lower cost
Principle 6
Markets are usually a good way to organize economic activity
Communist Countries
(Central Planning) The government officials allocate economy's scarce resources
1. What goods were produced
2. How much was produced
3. Who produced these goods and services
A Market Economy :
Allocates resources
1. Through decentralized decisions of many firms and households
2. As they interact in markets for goods and services
3. Guided by prices and self interest
Adam Smith's Invisible Hand
Households and firms interacting in the economy act as if they are guided by an invisible hand. This leads to desirable market outcomes.
Corallary
Government Intervention:
Prevents the invisible hands ability to coordinate the decisions of the households and firms that make up an economy
Principle 7
Governments can sometimes improve market outcomes
We need government
1. Enforce rules (i.e. property rights)
2. Promotes efficiency (avoids market failure)
3. Promotes equality (avoids disparities in the economic wellbeing)
Property rights
The ability of the individual to own and exercise control over scarce resources
Market Failure
Situation in which the market on its own fails to produce an efficient allocation of resources
Causes for Market Failure
Externality: impact of one persons action on the well being of the bystander
Market Power: Ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Disparities in Economic Well being
1. A market economy rewards people according to their ability to produce things that other people are willing to pay for
2. Government intervention: Public policies :: may diminish inequality and process far from perfect
Principle 8
A country's goods and standard of living depends on its ability to produce goods and services
Large differences in living standards
among countries
over time
Explanation
differences in productivity
Productivity
1. Quantity of goods and services produced from each unit of labor input
2. Higher Productivity (higher standard of living)
3. Growth rate of nations productivity (determines growth rate of average income)
Principle 9
Prices rise when the Government prints too much money
Inflation
An increase in the overall level of prices in the economy
Causes for large/persistent inflation
Growth in quantity of money (then the value of money decreases)
Principle 10
Society faces a short run trade-off between inflation and unemployment
Short run effects on monetary injections
1. stimulates the level of spending (higher demand of goods and services)
2. Firms raise prices and higher more workers/produce more goods and services
3. lower unemployment
Short run trade-off between unemployment and inflation
Key role- analysis of business cycle
Business Cycle
Fluctuations in economic activity (employment/production)
