Ten Principles of Economics

What is Economics? Economics is the study of how the society manages its scarce resources. Scarcity is the limited nature of society’s resources land, labor, and capital and therefore cannot produce all goods and services the society wishes to have. Economists study how people make decisions, interact with one another, and analyze forces that affect the economy.

Basic Concepts of Economic Analysis Limited resources—land, labor, capital, and entrepreneurship Unlimited wants Need for choice between alternative uses of resources Efficient use of resources—productive and allocative efficiency

Ten Principles of Economics: How do people make decisions? People face tradeoffs (choices) Efficiency and equity Efficiency means getting the most you can from scarce resources. Equity means benefits of resources are distributed fairly among society People compare costs and benefits Opportunity cost Opportunity Cost is what you give up from one alternative (choice) to get what you want (from another choice) Cost benefit comparison

Ten Principles of Economics: How do people make decisions? Rational people think at the margin (incremental change) Marginal Benefits (MB) Marginal Costs (MC) MB>MC People respond to incentives Decision to choose one good over another occurs when MB > MC.

Ten Principles of Economics: How do people interact? Trade can make every one better off Competition and specialization Comparative advantage versus absolute advantage Markets can organize economic activity Allocation of resources through decentralized decisions of many firms and house-holds Interaction between household and business is by an “invisible hand” Governments can improve market outcomes Market failure Externality Market power

Ten Principles of Economics: How does the economy work Country’s standard of living depends on its productivity Differences in standard of living between countries is attributable to the productivity of the country Productivity is the amount of goods and services produced per hour of a worker’s time Printing of too much money can cause inflation Inflation is an increase in the overall level of prices in the economy

Ten Principles of Economics: How does the economy work Society faces a short-run trade-off between inflation and unemployment Phillips Curve Inflation Unemployment