Economics Chapter 1

Scarcity

society has limited resources and therefore cannot produce all the goods and services people wish to have

Economics

The study of how society manages its scarce resources

Principle 1

People face trade-offs

Principle 2

The cost of something is what you give up to get it

Efficiency

society is getting the maximum benefits from its scarce resources

Equality

those benefits are distributed uniformly among society’s members

Opportunity Cost

what you give up to get that item

Principle 3

Rational people think at the margin

Rational people

systematically and purposefully do the best they can to achieve their objectives, given the available opportunities

Marginal Change

describe a small incremental adjustment to an existing plan of action

Principle 4

People respond to Incentives

incentive

something that induces a person to act

Principle 5

Trade can make everyone better off

Principle 6

Markets are usually a good way to organize economic activity

Market Economy

the decisions of a central planner are replaced by the decisions of millions of firms and households

Principle 7

Governments can sometimes improve market outcomes

Property Rights

the ability of an individual to own and exercise control over scarce resources

market faliure

a situation in which a market left on its own fails to allocate resources efficiently

externality

the impact of one person’s actions on the well-being of a bystander

market power

the ability of a single economic actor to have a substantial influence on market prices

Principle 8

A country’s standard of living depends on its ability to produce goods and services

Productivity

the quantity of goods and services produced from each unit of labor input

Principle 9

Prices rise when the government prints too much money

Inflation

an increase in the overall level of prices in the economy

Principle 10

Society faces trade-offs when making choices

Business Cycle

fluctuations in economic activity, such as employment and production