Principles of Economics and Scarcity

Scarcity

A condition in which the resources available are insufficient to satisfy people's wants.

Economics

Science of choice; the study of how society manages its scarce resources and the choices people make to cope with scarcity.

What do Economists do?

Study how people make decisions, study how people interact with each other, and analyze forces and trends that affect the economy as a whole.

Principles of Economics

These underlie the economics of individual choice, interactions of individual choices, and economy-wide interactions.

Principle #1

Choices are necessary because resources are scarce.

Opportunity Cost

What you must give up in order to get something.

Principle #2

The true cost of something is its opportunity cost.

Principle #3

"How much" is a decision at the margin.

Trade-off

Comparison of costs and benefits when making decisions.

Marginal Changes

Adjustments around the edges of what you are doing.

Marginal Analysis

Decisions requiring making trade-offs at the margin.

Principle #4

People usually respond to incentives, exploiting opportunities to make themselves better off.

Economy

A group of people interacting with each other.

Principle #5

There are gains from trade.

Specialization

When two people divide tasks among themselves, providing goods or services that others want in return for different goods and services.

Markets

What allows individuals to specialize and trade; a group of buyers and sellers.

Principle #6

Markets move toward equilibrium.

Equilibrium

An economic situation in which no individual would be better off doing something different.

Principle #7

Resources should be used efficiently to achieve society's goals.

Efficient

Used in a way that has fully exploited all opportunities to make everyone better off.

Equity

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

Principle #8

Markets usually lead to efficiency, but when they don't, government intervention can improve society's welfare.

Market Failure

The market fails to allocate society's resources efficiently.