Ten Principles of Economics

1. Trade off -between efficiency and equity Efficiency - the property of society getting the most it can from its scarce resources Equality - the property of distributing economic prosperity uniformly among the members of society When does a tradeoff occur? –A tradeoff occurs when some quality of products, production or consumption of a good or service is given up in order to produce or consume another good of service 2.Opportunity cost Opportunity Cost - whatever must be given up to obtain some item

3.Rational People think at the margin Rational people think at the margin - People make decisions based on what furthers their interests 4.People respond to incentive People respond to incentives - something that induces a person to act i.e. taxes used to alter behavior 5.Trade makes everyone better off Trade makes everyone better off - Trade is not a zero sum game; both sides win. They both profit from trade. 6.Markets are good ways to organize economic activity A market economy allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Buyer and sellers, supply and demand sets prices.

7. Governments can sometimes improve market outcomes There are two broad reasons for the government to interfere with the economy: the promotion of efficiency and equity. Government policy can be most useful when there is market failure. – market failure: a situation in which a market left on its own fails to allocate resources efficiently. Examples of Market Failure – externality: the impact of one person’s actions on the well-being of a bystander. (Ex.: Pollution) – market power: the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

8. Forces and Trends Affect How The Economy as a Whole Works The standard of living depends on a country’s production Differences in living standards from one country to another are quite large. The explanation for differences in living standards lies in differences in productivity. – productivity: the quantity of goods and services produced from each hour of a worker’s time. To boost living standards the policy makers need to raise productivity by ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best available technology. 9.Prices rise when gov. prints too much money Prices rise when the government prints too much money – inflation –inflation: an increase in the overall level of prices in the economy. When the government increases the money supply, the value falls, and prices rise.

10. Society faces a short run tradeoff between inflation and unemployment. Increasing the amount of money in the economy stimulates spending and increases the demand of goods and services in the economy. The short-run trade-off between inflation and unemployment plays a key role in the analysis of the business cycle. Definition of business cycle: fluctuations in economic activity, such as employment and production.