Econ 202 1st Edition Lecture 4First PrinciplesOutline of Last Lecture - Modelso Economic StructureOutline of Current Lecture i. A set of principles for understanding how individuals make choicesii. A set of principles for understanding how individual choices interactiii. A set of principles for understanding economy-wide interactionsCurrent LectureIndividual Choice: The Principles1. Choices are necessary because resources are scarce.Resource: anything that can be used to produce something else.Scarce: in short supply; a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it.2. The true cost of something is its opportunity cost.Opportunity cost: What you must give up in order to get something.3. “How much” is a decision at the margin.1. Trade-off: Comparison of the costs and the benefits of doing something. a. Example: eating a candy bar (cost and benefit)Marginal decision: decision made at the margin of an activity about whether to do a bit more or a bit less of that activity.Marginal analysis: the study of marginal decisions.Ex: taxing or banning soda because of its negative health 4. People usually respond to incentives, exploiting opportunities to make themselves better off.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.Interaction and Individual Choice Specialization:5. There are gains from tradeTrade allows us all to consume more than we otherwise could.Specialization: the situation in which each person specializes in the task that he or she is good at performing.6. Markets move toward equilibrium.Equilibrium: An economic situation in which no individual would be better off doing something different.7. Resources should be used efficientlyto achieve society’s goals.Efficient: taking all opportunities to make some people better off without making other people worse off.Equity: a condition in whicheveryone gets his or her “fair share.” (There are many definitions of equity.)Equity and efficiency are often at odds.8. Markets usually lead to efficiency.People normally take opportunities for mutual gain9. When markets don’t achieve efficiency,government intervention can improve society’s welfare.Sometimes markets fail and need correction.Economy-Wide Interactions10. One person’s spending is another person’s income.**During recessions, a drop in business spending leads to:Less income, less spending……and further drops in business spending, layoffs, and rising unemployment.11. Overall spending sometimes gets out of line with the economy’s productive capacity.12. Government policies can change