ECN 222 1st Edition Lecture 3Outline of Last Lecture - What is Economics?- 10 Principles of Economics (1-4)Outline of Current Lecture - Review Principles #1-4- Moral Hazard- The Principles of how people interact (5-7)Current Lecture- Principles #1-4o Principle #1 People face tradeoffso Principle #2 The cost of something is what you give up to get ito Principle #3 Rational people think at the margino Principle #4 People respond to incentives- Moral Hazard: Taxing income vs. consumptiono Tax income, less incentive to worko Tax consumption, people consume less and save more- **The principles of how people interacto *Principle #5 Trade can make everyone better off People can specialize in producing one good and exchange it for other goods Countries also benefit from trade and specialization- Get a better price abroad for goods they produce US: High skill capital intensive goods Buy other goods more cheaply from abroad than could be produced at homeo *Principle #6 Markets are usually a good way to organize economic activity Market: a group of buyers and sellers 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. “Organic economic activity” means determining a market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets.- How?, What?, How much?, and Who? Are the basic questions asked in households when buying goods. Each of these households and firsts acts as if “led by an invisible hand” to promote general economic well-being The “invisible hand” works through price systems The interactions of buyers and sellers determines prices Each price reflects good’s value to buyers and the cost of producing the goodso *Principle #7 Governments can sometimes improve market outcomes Important role for government enforce property rights (with police, courts, so on…) Property rights: the ability of an individual to won and exercise control over scarce resources People less inclined to work, produce, invest, or purchase if large risk of their property being stolen Government can improve efficiency when there is:- Market fail: when market fails to allocate resources efficiency - Causes:o Price system not working properlyo Externalities, when the production or consumption of a good affects bystanders (pollution)- Government should tax producers of negative externality the cost of the externality compensate those harmed- Government “should” subsidize producers of positive