chp 1

What is Economics?

• Managing scarce resources.

• Macro (whole economy), Micro (individuals).

Three Economic Questions

1. What to produce?

2. How to produce?

3. How to distribute?

Types of Economies

Market Economy

• Self-interest, profit, freedom.

• Risk of unregulated behavior.

Command Economy

• Focuses on equity, stability.

• Lacks efficiency, innovation.

Government Intervention

• Tradeoff: Efficiency vs. Equality.

Principles of Economics

1. Scarcity: Limited resources, requires tradeoffs.

2. Opportunity Cost: Value of next best alternative given up.

3. Decision-making at the Margin: Incremental choices.

4. Marginal Analysis: Compare Marginal Benefit (MB) vs. Marginal Cost (MC).

Incentives

• Positive: Encourage.

• Negative: Discourage.

Market Equilibrium

• Supply equals demand.

Economic Models

1. Positive Economics: Describes facts.

2. Normative Economics: Suggests opinions.