Economics

Scarcity:

the limited nature of society’s

resources

Principle #1:

People Face Tradeoffs

All decisions involve tradeoffs.

Examples:

 Going to a party the night before your midterm

leaves less time for studying.

 Having more money to buy stuff requires working

longer hours, which leaves less time for leisure.

 Protecting the environment requires resources

that could otherwise be used to produce

consumer goods.

 Society faces an important tradeoff:

efficiency vs. equality

 Efficiency: when society gets the most from its

scarce resources

 Equality: when prosperity is distributed uniformly

among society’s members

 Tradeoff: To achieve greater equality,

could redistribute income from wealthy to poor.

But this reduces incentive to work and produce,

shrinks the size of the economic “pie.”

Principle #2:

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

The opportunity cost of any item is

whatever must be given up to obtain it.

Principle #3:

Rational People Think at the

Margin

Marginal cost (MC): The change in total cost resulting

from a change from quantity

MC = ΔTC/ΔQ

Marginal benefit (MB): The change in total benefit

resulting from a change from quantity

MB = ΔTB/ΔQ

Principle #4:

People Respond to Incentives

Examples:

 When gas prices rise, consumers buy more

hybrid cars and fewer gas guzzling SUVs.

 When cigarette taxes increase,

teen smoking falls.

Principle #5:

Trade Can Make Everyone Better Off

 Rather than being self-sufficient,

people can specialize in producing one good or

service and exchange it for other goods.

 Countries also benefit from trade & specialization:

 Get a better price abroad for goods they produce

 Buy other goods more cheaply from abroad than

could be produced at home

Principle #6

Markets Are Usually A Good Way to Organize Economic Activity

 Market: a group of buyers and sellers

(need not be in a single location)

 “Organize economic activity” means determining

 what goods to produce

 how to produce them

 how much of each to produce

 who gets them

 The 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.

Invisible hand

A market economy allocates resources through

the decentralized decisions of many households

and firms as they interact in markets.

Each of these households and firms

acts as if “led by an invisible hand”

to promote general economic well-being.

Economics mechanism

Market economies rely on private ownership, competition, and supply/demand forces to determine production and prices, fostering innovation and efficiency. Conversely, planned economies (command systems) have centralized government control over resources, setting production goals and prices directly, prioritizing stability and state goals over consumer choice

Principle #7:

Governments Can Sometimes

Improve Market Outcomes

Market failure:

when the market fails to allocate society’s resources efficiently

 Causes:

 Externalities, when the production or consumption

of a good affects bystanders (e.g. pollution)

 Market power, a single buyer or seller has

substantial influence on market price (e.g. monopoly)

 In such cases, public policy may promote efficiency.

Principle #8:

A country’s standard of living

depends on its ability to produce goods & services.

The most important determinant of living standards:

productivity, the amount of goods and services

produced per unit of labor.

Principle #9:

Prices rise when the

government prints too much money.

Inflation: increases in the general level of prices.

Principle #10:

Society faces a short-run tradeoff between inflation and unemployment

Factors of production:

 labor

 land

 capital (buildings & machines used in

production)

Law of demand

lượng tăng giá giảm và ngược lại

Law of supply

lượng tăng giá tăng

Accounting profit

=total revenue minus total explicit costs

Economic profit

=total revenue minus total costs (including

explicit and implicit costs)