Economy comes from the Greek word "oikonomos," meaning "one who manages a household."
Scarcity: the limited nature of society's resources.
Economics: the study of how society manages its scarce resources.
1-1 How People Make Decisions
Principle 1: People Face Trade-Offs
Making decisions requires one goal to be given up for another.
Society groups things into different trade-offs.
Ex: The more money spent on guns for defending the nation, the less money is left to spend on butter or other consumer goods that are used to raise the standard of living.
Efficiency vs. Equality is a common trade-off in society.
Efficiency: the property of society getting the most it can from its scarce resources.
Equality: the property of distributing economic prosperity uniformly among the members of society.
The Welfare System and Unemployment Insurance help society.
Income taxes help the government.
Government policies result in less efficiency.
People make better decisions when they have a variety of options to analyze.
Principle 2: The Cost of Something Is What You Give Up to Get It
Compare the costs and benefits of something before making a decision on it.
Ex: Before deciding on a college, one must compare the benefits and opportunities of said college, as well as the costs (tuition, books, room).
Opportunity cost: whatever must be given up to obtain some item.
Decision-makers should go over each possible action before making a decision.
Principle 3: Rational People Think at the Margin
Rational people: people who systematically and purposefully do the best they can to achieve their objectives.
Decisions are rarely ever black and white.
Marginal change is used by economists to describe a small adjustment to an action plan.
Marginal change: a small incremental adjustment to a plan of action.
Because margin means "edge," marginal changes are often formed around the edges of things.
Marginal benefits and marginal costs are compared in order to make rational decisions.
Paying for goods is based upon the marginal benefit, which is depended upon how many units of the good a person has.
Rational decisions are made when an action's marginal benefits are larger than its marginal cost.
Principle 4: People Respond to Incentives
Incentive: something that induces a person to act.
Ex: A reward or punishment.
Rational people respond to incentives because they make it easier to make a decision.
Incentives are the key to knowing how markets work.
Higher market prices result in less consumerism but an incentive for more production.
Taxes on gas lead people to drive more small and fuel-efficient vehicles.
The law affects auto safety and behavior.
Sam Peltzman argued that seat belt laws led to fewer deaths per accident but more accidents.
Conclusion: The net result is changed very little in regards to the number of driver deaths and an increase in pedestrian deaths.
1-2 How People Interact
Principle 5: Trade Can Make Everyone Better Off
The U.S. and China compete for the same customers when it comes to market goods.
Trade benefits people and countries’ livelihoods.
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Central planning meant that the government could organize an economic activity that was beneficial for the country.
Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Firms decide whom to hire and what is to be made.
Households decide what to buy with their income from a firm of their choice.
An Inquiry into the Nature and Causes of the Wealth of Nations was written by Adam Smith, an economist, in 1776.
Adam Smith observed that households and firms are guided by an "invisible hand" while interacting in markets, leading to a desirable market outcome.
Prices are used by the invisible hand to direct economic activity.
Buyers: look at how much to demand in a market.
Sellers: look at how much (price-wise) to supply.
Smith's outcome: prices adjust to satisfy buyers and sellers, in turn, increasing society's well-being.
Communist countries determine prices by central planners, rather than in the marketplace.
The government uses the power of police to keep unauthorized drivers off the streets and prevent unauthorized prices from being charged by drivers.
Principle 7: Governments Can Sometimes Improve Market Outcomes
We study economics to gain a better view of government policy's role in society.
Property rights: the ability of an individual to own and exercise control over scarce resources.
Market failure: 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 (or small group of actors) to have a substantial influence on market prices.
In a market economy, people are rewarded based on how well they can produce things that are worthy of being paid for.
Inequality could lead to government intervention.
1-3 How the Economy as a Whole Works
Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
2017: the average American earned roughly $60,000; the average German earned roughly $51,000; the average Chinese earned roughly $17,000, and the average Nigerian earned no more than $6,000.
High-income countries have better healthcare, better nutrition, and better technology, which leads to a longer lifespan than those in low-income countries.
Income has grown by 2% each year in the United States. With this in mind, the average income will double every 35 years.
Productivity: the number of goods and services produced from each unit of labor input.
Living standards can only be risen if policymakers ensure that workers are well educated and have the resources needed to produce goods and services, which also includes the use of high-quality technology.
Principle 9: Prices Rise When the Government Prints Too Much Money
President Gerald Ford called inflation "public enemy number one" during the 1970s.
inflation: an increase in the overall level of prices in the economy.
Inflation is typically caused by the growth of the nation in the quantity of money.
Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment
In the long run, prices are raised by an increase in the amount of money, but there are also a variety of short-run effects of money growth. These include but are not limited to: stimulating the overall level of spending and thus the demand for goods and services; a higher demand could result in firms raising their prices, while encouraging them to hire more workers, thus producing a larger amount of foods and services; and the employment of more people leads to less unemployment.
Business cycle: fluctuations in economic activity, such as employment and production.
Policymakers have the ability to influence the demand for goods and services by altering how much the government spends, how much it taxes, and how much it prints.