2 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.
3 Basic Concepts of Economic Analysis Limited resources—land, labor, capital, and entrepreneurshipUnlimited wantsNeed for choice between alternative uses of resourcesEfficient use of resources—productive and allocative efficiency
4 Ten Principles of Economics: How do people make decisions? People face tradeoffs (choices)Efficiency and equityEfficiency means getting the most you can from scarce resources.Equity means benefits of resources are distributed fairly among societyPeople compare costs and benefitsOpportunity costOpportunity Cost is what you give up from one alternative (choice) to get what you want (from another choice)Cost benefit comparison
5 Ten Principles of Economics: How do people make decisions? Rational people think at the margin (incremental change)Marginal Benefits (MB)Marginal Costs (MC)MB>MCPeople respond to incentivesDecision to choose one good over another occurs when MB > MC.
6 Ten Principles of Economics: How do people interact? Trade can make every one better offCompetition and specializationComparative advantage versus absolute advantageMarkets can organize economic activityAllocation of resources through decentralized decisions of many firms and house-holdsInteraction between household and business is by an “invisible hand”Governments can improve market outcomesMarket failureExternalityMarket power
7 Ten Principles of Economics: How does the economy work Country’s standard of living depends on its productivityDifferences in standard of living between countries is attributable to the productivity of the countryProductivity is the amount of goods and services produced per hour of a worker’s timePrinting of too much money can cause inflationInflation is an increase in the overall level of prices in the economy
8 Ten Principles of Economics: How does the economy work Society faces a short-run trade-off between inflation and unemploymentPhillips CurveInflationUnemployment