Chapter 1 - Ten Principles of Economics

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