U1: Fundamental Principles of Economic Thinking

8/13/26

What is the fundamental economic problem?

scarcity

What does scarcity mean?

unlimited wants, but limited (finite) resources

Scarcity forces people to do what? What do these entail?

scarcity forces people to make choices, which may mean unintended consequences and effects on others

What are the costs of choices called?

trade-offs

What is principle 1? What complicates things during this?

• everything involves a trade-off (“choosing is refusing”)

• the presence of several alternatives complicates things

What is principle 2? What does it mean?

Opportunity cost (OC), the cost of something is whatever you give up in order to get it

What is principle 3?

rationality and marginal thinking for making decisions

What is rationality?

thinking marginally and considering the results/future impact

How do you do a marginal (cost-benefit) analysis?

• if the benefit outweighs the cost = do it

• if the cost outweighs the benefit = don’t do it

What is principle 4?

incentives are important

what does an incentive cause? what are some examples of this?

• causes people to modify their behavior based on the incentives involved

• BOGO, bulk prices at costco, threats of punishment or performance-based bonuses

What is economics primarily concerned with?

material welfare

What is the main goal of economics?

How we can provide the most material benefit for the largest amount of people

What is principle 5?

trade can benefits everyone involved

What leads to innovation and better consumer deals?

free trade and competition among suppliers

What is principle 6?

markets are the best means of facilitating trade

what is a market?

any place where people and businesses exchange goods and services

what two things guide decision making?

prices (cost) and self-interest

What is principle 7?

markets need oversight (like rules, oversight, and gov. regulations)

what is oversight in markets meant to do?

improve equity, efficiency, and minimize problems

What is principle 8?

our standard of living is influenced by our ability to produce goods and services, aka productivity

why does productivity differ across countries?

the level of technological advancement, education/skill levels of workers, type of work involved

What is principle 9?

prices often rise due to an excess amount of money in circulation

what is inflation? how does that work?

an overall rise in price levels because the more of something that exists, the less valuable it is

What is the ultimate goal in life?

maximizing utility (satisfaction)

Everything in life exhibits diminishing marginal ____. What does this mean?

• diminishing marginal utility

• an economic rule. It states that as you get more of an item, the extra joy or use from each new piece goes down

What happens when there are successive amounts of something?

less and less overall satisfaction

What is diminishing marginal returns?

productivity eventually dips with successive dips with successive amounts of labor – “too many cooks in the kitchen”

What is a Production-Possibilities Frontier?

a graph that demonstrates possible levels of output with current resources, productivity levels, levels of technology

What does the curve of a production-possibilities frontier adjust based on? What kind of line do you use to draw it?

• circumstances

• solid for starting curve, dashed line for different

What does a circular flow model show?

shows how money, goods, and services cycle through the households (people) and businesses (the ones selling goods and services)

microeconomics vs macroeconomics

• micro: studies individual economic behavior (like one business or your own personal decisions)

  • macro: studies economy-wide phenomena (like a summation of all individual businesses or national levels of inflation/unemployment)

positive vs normative statements

• positive statements = descriptive (what actually exists), backed up by evidence/data

• normative statements = subjective (how things should be), can’t prove

equity vs efficiency

• equity is distributing/benefiting from resources fairly

• efficiency is getting the most we can from our scarce resources

what are externalities? what should you do with the knowledge of externalities?

effects of one’s actions on others; should be factored into rational decision making