ECN 222 1st Edition Lecture 2 Outline of Last Lecture - Principles of Macroeconomics- Review of Micro***- Who should control the economy?- Government?- Corporations?- Equality vs. Efficiency and Real vs. NominalOutline of Current Lecture - What is Economics?- 10 Principles of Economics (1-4)Current LectureWhat is Economics all about?- Scarcity: the limited nature of society’s resources- Economics: the study of how society manages its scarce resources, e.g.o How people decide what to buy, how much to work, save, and spendo How firms decide how much to produce, how many workers to hireo How society decides how to divide its resources between national defense, consumer goods, protection the environment, and other needs- 10 Principles of Economics o How people make decisions (Principles 1-4) What to buy, how much to work, how much to save and spendo How people interact (Principles 5-7)- ** The principles of how people make decisions- *Principle # 1 People face trade offso Society faces an important trade off: Efficiency vs. Equalityo Efficiency: when society gets the most from its scarce resources Efficiency means more than simply using everything!These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Equality: when prosperity is distributed uniformly among society’s members- *Principle #2 The cost of something is what you give up to get it.o Comparing the cost and benefits of alternative choiceso The opportunity cost of any item is whatever must be given up to obtain it.o It is the relevant cost of decision making!- *Principle #3 Rational people think at the margino Rational people- pursuing own objectives (self-interest) It is not about being selfish it is about taking care of ones best interest whether it be for the individuals self, family, or company. It is to be systematically and purposefully to obtain ones best interests (well-being: financially, physically, every desire obtainable)o Making decisions by evaluating cost and benefits of marginal changes  Marginal Changes: incremental adjustments to an existing plano Ignore sunk costs Sunk costs: costs that have already been incurred- *Principle #4 People respond to incentiveso Incentive: something that induces a person to act, i.e. the prospect of a reward or punishmento Rational people respond to incentiveso “Sure way to get less of something is to tax