Lecture 1Outline of Current Lecture I. Defining economicsII. Chapter one: The Ten Big IdeasCurrent LectureI: The Basic IdeasDefinition: Economy (Dikonomos): “One who manages a household”.Household SocietyWhich members do which tasks?Decisions need to be made What jobs will be done and who will do them? Central idea: - The household must allocate its scarce resources among its various members, taking into account each member’s abilities, efforts, and desires.- The society has to allocate people to various jobs and allocate the output of goods and services they produce. Def.: Scarcity: the limited nature of society’s resources. Central idea: resources are scarce.Def.: Economics: The study of how society manages its scarce resources.o How people decide what to buy, how much to work, how much to save and spend.o How firms decide how much to produce, how many workers to hire.o How society decided to divide its resources between rational defense, welfare programs, and consumergoods.II. Chapter One: The Ten Big Ideas1. How do people make decisions?2. How do people interact?3. How does the economy work as a whole? Big Idea #1: People respond to incentives.-Def.: Incentive: something that induces a person to act; the prospect of a reward or punishment.*Note: rational people respond to incentives.Ex. When gas prices rise, consumers will buy more hybrid cars and fewer SUV’s. ECON 1 1st EditionBig Idea #2: Markets are usually a good way to organize economic activity.-Def.: Market: group of buyers and sellers. They organize economic activity and determine a) what goods to produce, b) how to produce them, c) how much of each to produce, and d) who gets them.*Note: A market economy allocates resources through decentralized decisions of many households and firms as they interact in markets.- 1776- Adam Smith- Wealth of Nationso “…when markets work well, those who purpose their own interest end up promoting the social interests, as if led to do so by an invisible hand.” o This explains the failure of communism.- Look up on YouTube: Milton Friedman- Lesson of the pencil.Big Idea #3: People face trade-offs.-Def.: Efficiency: when society gets its most from scarce resources. Equality: when prosperity is distributed uniformly among society’s members. Central idea: society faces an important trade-off: efficiency vs. equality.Ex: a) guns and butter b) redistribute wealth Central idea: opportunity cost: making decisions requires comparing costs and benefits of alternative