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Ten Principles of Economics

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1 Ten Principles of Economics
Chapter 1 Ten Principles of Economics 1

2 comes from a Greek word for “One who manages a household.”
The word Economy . . . comes from a Greek word for “One who manages a household.” 2

3 Scarcity... … means that society has less to offer than people wish to have. Managing society’s resources is important because resources are scarce. 5

4 Economics is the study of how society manages its scarce resources
Economists study. . . …how people make decisions. people interact with each other. …the forces and trends that affect the economy as a whole. 6

5 Ten Principles of Economics: How People Make Decisions
1. People face tradeoffs 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. 7

6 1. People face tradeoffs To get one thing, we usually have to
give up another thing. Guns vs. Butter Leisure Time vs. Studying Environment vs. Econ Growth 8

7 2. The Cost of Something Is What You Give Up to Get It
Decisions require comparing costs and benefits of alternatives Going to college vs. going to work Opportunity Cost is what you give up from one alternative (choice) to get what you want (from another choice) 10

8 3. Rational People Think at the Margin
Marginal changes are small, incremental adjustments to an existing plan of action. Comparing benefits and costs of a critical choice Marginal Benefits => MB Marginal Costs => MC 11

9 4. People Respond to Incentives
Marginal changes in costs or benefits from decisions motivate people to respond. Decision to choose one good over another occurs when MB > MC. 12

10 Ten Principles of Economics: How People Interact
5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Government can sometimes improve market outcomes. 14

11 5. Trade Can Make Everyone Better Off
Individuals gain from their ability to trade with others. Competition results in gains from trading. Trade allows one to specialize in what they do best. 15

12 6. Markets Are Usually a Good Way to Organize Economic Activity
In a Market Economy, households and business firms determine what to buy, who to work for, who to hire and what to produce. Interaction between household and business is as if by an “invisible hand.” 16

13 7. Governments Can Sometimes Improve Market Outcomes
When the market fails (breaks down) government intervenes to promote Efficiency promote Equity 17

14 Efficiency Vs. Equity Efficiency means . . .
…getting the most you can from scarce resources. Equity means . . . …benefits of resources are distributed fairly among society. 9

15 7. Governments Can Sometimes Improve Market Outcomes
Market failure may be the cause of an externality which is the impact of one person’s actions on the well-being of another person. (example: pollution) Market power is the ability of a single person to unduly influence market prices. 18

16 Ten Principles of Economics: How the Economy as a Whole Works
8. A country’s standard of living depends on its ability to produce goods and services. 9. Prices rise when the government prints too much money. 10. Society faces a short-run tradeoff between inflation and unemployment. 20

17 8. Standard of living depends on a country’s production.
Standard of Living may be measured in different ways (e.g. personal income or total market value of a nations production.) Differences in standard of living between countries or even states is attributable to the productivity of the country or state. 21

18 8. Standard of living depends on a country’s production.
Productivity is the amount of goods and services produced from different resources Productivity => Standard of Living 22

19 9. Prices Rise When The Government Prints Too Much Money
Inflation is an increase in the overall level of prices in the economy. One cause of inflation is the growth in the quantity of money. 23

20 Inflation Unemployment
10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment Inflation Unemployment A Short-Run Tradeoff. You Choose. This tradeoff is called the Phillips Curve (see Figure 33-1, p. 763) 24

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