TEN PRINCIPLES OF ECONOMICS Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have Economicsis the study of how society manages its scarce resources TEN PRINCIPLES OF ECONOMICS scarcity every society has to Faced with answer the following three questions What goods and how many of them should be produced What resources should be used Price TEN PRINCIPLES OF ECONOMICS How people make decisions People face tradeoffs the opportunity cost The cost of something is the margin Rational people think at incentives People respond to 1 TEN PRINCIPLES OF ECONOMICS How people interact with each other Trade can make everyone better off Markets are usually a good way to organize economic activity Policies can sometimes improve economic outcomes Principle 1 People Face Tradeoffs To get one thing we usually have to give up another thing Guns v butter Food v clothing Leisure time v work Efficiency v equity Principle 1 People Face Tradeoffs Efficiency v Equity efficiency means society gets the most that it can from its scarce resources Equity means the benefits of those resources are distributed fairly among the members of society 2 Principle 2 The Cost of Something Is What You Give Up to Get It costs Decisions require comparing of alternatives Whether to go to college or to work Whether to study or go out on a date Whether to go to class or sleep in cost The of an item is what you give up to obtain that item Principle 3 Rational People Think at the Margin Margins are small incremental adjustments to an existing plan of action People make decisions by comparing the margin costs and benefits at Principle 4 People Respond to Incentives Incentives in costs or benefits motivate people to respond The decision to choose one alternative over another occurs when that alternative s exceed its 3 Principle 5 Trade Can Make Everyone Better Off People gain from their ability to trade with one another to specialize in what they do best Trade allows people Principle 6 Markets Are Usually a Good Way to Organize Economic Activity market economy A is an economy that allocates resources through the decentralized firms and households decisions of many as they interact in markets for goods and services Households decide what to buy and who to work for Firms decide who to hire and what to produce Principle 7 Governments Can Sometimes Improve Market Outcomes Market failure occurs when the market fails to allocate resources efficiently When the market fails breaks down government can intervene to promote efficiency and equity Market failure may be caused by Externality which is the impact of one person or an firm s actions on the well being of a bystander Market power which is the ability of a single person or firm to unduly influence market prices 4