!what is economics!•social science that studies the choices that people make to attain their goals, given their scarce resources !◦other social sciences = sociology, psychology!‣micro = focuses on individuals (people or firms), seeks to answer the questions of what to produce? how ◦much to produce? who receives the good produced!macro = study of economy as a whole, economic growth, unemployment, inflation, income distribution!◦!10 Principles!principle 1: People Face Trade-offs!•when making a decision...!◦trade off one action/goals for another!‣individuals: time and money!◦when I decide on one thing I am giving up something else, a movie ticket is $12 what else could I have ‣done with that money!even when it doesn't involve money, how you spend your time!‣even if you have a huge budget, if you buy one thing you are giving up what you could have used that ‣money for!society:!◦military goods vs consumer goods!‣efficiency vs equality!‣efficiency: society getting the most of its scarce resources!•size of economic pie!•equality!‣distributing the economic prosperity!•how the economic pie is divided up among individuals !•who gets what and how much of each !•lucky if your most efficient system is also the most equitable, this is often not the case !‣principle 2: The cost of something is what you give up to get it !•opportunity cost = the benefits of the next best alternative, whatever must be given up to obtain one item!◦ex. what I would have done if I hadn't gone to the movies is an opportunity cost!◦principle 3: Rational people think at a margin !•rational people = systematically and purposefully do the best they can to achieve their objectives, they do ◦what they do to make themselves best off!ex. $10 is preferred to $5!‣marginal changes = small incremental adjustments to a plan of action!◦rational people think marginally !‣ex. going to the movies, marginal cost is $12!‣marginal benefit (MB) = additional benefits from taking an action (ex. getting $20 marginal benefit from ‣going to the movies)!marginal cost (MC) = additional costs from taking an action!‣rational decision maker = will take an action if and only if MB>MC!‣assumption we make in this class is that people always think rationally!◦principle 4: People respond to incentives!•incentive = something that induces an economic agent to act (ex. when price went up on cigarettes in US ◦people bought less cigarettes !higher prices!◦buyers consume less!‣sellers produce more !‣public policies!◦change in costs or benefits changes people's behavior !‣principle 5: Trade can make everyone better off!•trade = allows each person to specialize in the activities tat he or she does best!◦this allows a greater variety of goods and services at a lower cost!‣idea of trade can be expended to the international level!‣without trade, everyone would have to do everything at themselves!‣can consume a lot more if you allow people that are good at certain things do them, and you do the •things you're good at !principle 6: Markets are usually a good way to organize economic activity!•spectrum of economies!◦communist countries!‣centrally planned - there is a group that decides:!•what goods and services (g/s) to produce!◦how much to produce!◦who produces the g/s and who consumes the g/s!◦capitalist countries - millions of people decide the questions above!‣decentralized decisions of many firms and households!•how do they decide what to do? guided by prices and self interest !•households and firms interact in markets !◦act as if they are guided by an "invisible hand" (there is no one guiding them)!‣this leads them to desirable market outcomes!‣government intervention!◦limits ability of the "invisible hand"!‣principle 7: Governments can sometimes improve market outcomes !•do we need government? 99% of economists would say yes, but ask to what degree!◦enforce rules and maintain institutions!‣property rights = ability of an individual to own and exercise control over scarce resources (crucial for •incentives to work) - without property rights the economy is "screwed"!promote efficiency !‣avoid market failure!•market failure = situation in which the market on its own fails to produce an efficient allocation of ◦resources (national defense, flu shots, pollution - market power)!can happen in a lot of different types of markets (typically when there is spill over effects)!‣ex. if everyone gets a flu shot I have incentive to not get one because if everyone else has •the shot it is unlikely I am going to get the flu, but if everyone thinks like that the flu shot market fails!without the gov, the invisible hand will lead to inefficient outcomes and the gov can step in to make it •efficient !promote equality!‣avoid disparities in economic well-being !•principle 8, 9, and 10 - don't apply to this course!•8 = a country's standard of living depends on its ability to produce goods and services!◦9 = prices rise when the government prints too much money!◦10 = society faces a short-run trade-off between inflation and