Thinking Like an Economist

Scarcity - Resources are limited, so choices must be made

Opportunity Cost - the next best alternative that is given up when making a decision

Marginal Analysis - weighing the additional benefits vs the the additional costs of a decision

incentives matter - people respond to rewards and punishments

Trade is Beneficial - specialization and trade increase overall efficiency

10 Principles of Economics:

A. How people make decisions

1. people face trade offs

2. the cost of something is what you give up to get it

3. rational people think at the margin

4. people respond to incentives

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B. How People Interact

5. trade makes everyone better off

6. markets are usually a good way to organize economic activity

7. governments can sometimes improve market outcomes

C. How the Economy as a Whole Works

8. A country’s standard of living depends on it’s productivity

9. too much money printed leads to inflation

10. there is a short run trade offs between inflation and unemployment

Demand (marginal utility, consumer surplus, & rational spending)

Marginal Utility - Extra satisfaction (utility) gained from consuming one more unit of a good

Diminishing Marginal Utility - Each additional unit consumed provides less additional satisfaction

Consumer Surplus (CS) - the difference between what a consumer is willing to pay and what they actually pay

Rational Spending - Consumer maximize total utility given their budget constraints

Producer Surplus - market price minus sellers lowest acceptable price