Ten Principles of Economics Chapter 1

Terminology Economy Economy Households Households Society Society Scarcity Scarcity Economics Economics “How society manages scarce resources” “How society manages scarce resources”

How People Make Decisions 1. People Face Trade-offs To get something, must give up something To get something, must give up something Examples Examples Studying Studying Guns v. butter Guns v. butter Environment v. standard of living Environment v. standard of living Efficiency v. Equity Efficiency v. Equity Efficiency Efficiency Size of pie Size of pie Equity Equity How pie is divided How pie is divided

How People Make Decisions 2. Cost of Something Is What You Give Up to Get It Compare benefits and costs Compare benefits and costs Problems with calculating costs Problems with calculating costs What to include What to include Opportunity cost Opportunity cost 3. Rational People Think at the Margin Marginal changes Marginal changes Plane example Plane example 4. People Respond to Incentives Gas prices Gas prices Seat belts Seat belts

How People Interact 5. Trade Can Make Everyone Better Off Families Families Countries Countries 6. Markets Are Usually a Good Way to Organize Economic Activity Communism Communism Market economy Market economy Adam Smith Adam Smith Government interference Government interference

How People Interact 7. Governments Can Sometimes Improve Market Outcomes Protect assets Protect assets Increase efficiency Increase efficiency Market failure Market failure Externality Externality Market power Market power Increase equity Increase equity Economists v. Government policies Economists v. Government policies

How Economy as a Whole Works 8. Country’s Standard of Living Depends on Ability to Produce Goods and Services US average income US average income Impacted by productivity Impacted by productivity Policymakers Policymakers 9. Prices Rise When Government Prints Too Much Money Inflation Inflation 1920s Germany 1920s Germany 10. Society Faces a Short-Run Tradeoff between Inflation and Unemployment Phillips curve Phillips curve Business cycle Business cycle