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Scarcity
limited nature of society’s resources, implying that society cannot produce all the goods and services people wish to have
Economics
The study of how society manages its scarce resources
Firms
Economic agents that make decisions about what to produce, how much to produce, and how many workers to hire
Consumers
Economic agents that make decisions about what to buy, how much to save, and how many hours to work
the principles of economics in terms of how people make decisions are…
People Face Tradeoffs, The Cost of Something is What You Give Up to Get It, Rational People Think at the Margin, & People Respond to Incentives
Tradeoffs
to get one thing, we usually have to give up something else
what tradeoff does society face?
faces the tradeoff between efficiency and equity
Efficiency
Getting the most out of resources, representing the size of the economic pie
Equity
The fairness of economic allocation, representing how the economic pie is divided among society's members
Opportunity Cost
What you give up to obtain something (to become a doctor, you need to go to medical school, but you are giving up other careers)
Rational People
people who always try to do their best to achieve their objectives
what is a firm’s objective?
to maximize profit
what is a consumer's objective?
to achieve highest level of satisfaction
Marginal Changes
small incremental adjustments to an existing situation or plan
how do rational people make decisions?
by comparing marginal benefits and marginal costs
Incentive
Something that induces action, such as punishment or a reward
What is the effect of incentives?
Rational people respond to incentives, which can change behavior based on rewards or punishments
the principles of economics in terms of how people interact are…
Trade can Make Everyone Better Off, Markets Are Usually a Good Way to Organize Economic Activity, & Governments Can Sometimes Improve Market Outcomes
how can trade make everyone better off?
Trade allows each individual to specialize in activities they do best. by doing so, resources are allocated more efficiently and overall productivity increases
Market Economy
An economy that allocates resources through market forces where firms and households make self-interested decisions
Market Failure
A situation where resource allocation through the market is not efficient, often due to externalities or market power
Externality
one person’s action affects bystander positively or negatively (e.g. pollution)
Market Power
an ability of a single or small # of buyers or sellers to influence market price (e.g. monopoly)
how can government intervention in a market improve market outcomes?
combat externalities and market power which lead to market failure, improving efficiency
can take actions to promote equity as well (income taxes, welfare etc.)
Property Rights
The legal ability of someone to own and exercise control over scarce resources which government can enforce
the principle of economics in terms of how the economy works is…
A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
what does a country’s standard of living depend on?
its ability to produce goods and services
what is the main determinant of living standard?
productivity
Productivity
The quantity of goods and services produced from each hour of a worker’s time, which depend on tech, skills of workers and equipment
