Chapter 1: Ten Principles of EconomicsScarcity: The limited nature of societies resources- Society has limited resources and therefore cannot produce all the goods and services people wish to have.Economics: The study of how society manages its scarce resources.- The management of society's resources is important because resources are scarce.Efficiency: Society is getting the maximum benefits from its scarce resources.Equality: Those benefits are distributed uniformly among society's members.Opportunity Cost: Whatever must be given up to obtain a certain item.Rational people: People who systematically and purposefully do the best they canto achieve their objectives, given the available opportunities. Marginal change: A small incremental adjustment to a plan of action.Incentive: Something that induces a person to act.- Such as the prospect of a punishment or a reward.Market Economy: Economy that allocates resources through the decentralized decisions of many firms and households, they interact in markets for goods and services.Property Rights: The ability of an individual to own and exercise control over scarce resources.Market Failure: A situation in which a market left on its own fails to allocate resources efficiently.Externality: The impact of one person's actions on the well-being of a bystander.-Pollution-Possible cause of Market FailureMarket power: The ability of a single person/small group to unduly influence market prices.- Possible cause of Market FailureProductivity: the amount of goods and services produced from each unit of labor input.Inflation: an increase in the overall level of prices in the economyCauses:-In most cases of inflation, the problem is growth in the quantity of money. -When a government creates large quantities of the nation's money, the value of the money falls.Business cycle: the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed.Ten Principles of Economics:People Face Trade-offs• Making decisions require trading off one goal against another• Every hour given up to do something, an hour is lost to do something else• Society faces a trade-off between Efficiency and EqualityThe Cost of Something Is What You Give Up to Get It- Going to college creates better opportunities in life BUT it is very expensive.- Spending a year in school wastes a year you could be working at a job.Ration People Think at the Margin• Decisions are rarely black and white, often involve shades of grey (uncertainty)• Rational decision makers take an action if and only if the marginal benefit of the action exceeds the marginal cost. • Marginal Benefit is small for a cup of water because it is plentiful. Marginal benefitfor a diamond is large because they are rare.People Respond to Incentives• Positively or Negatively• The price of apples decreasesEat more apples (Vice Versa)• High Gas PricesBuy Smaller CarsMore Public Transit UseTrade Can Make Everyone Better Off• Usually, trade helps out both countries.• Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.• Isolation is BAD!• Trading with others allows people to buy a greater variety of goods and services at a lower cost.Markets Are Usually a Good Way to Organize Economic Activity• No one is looking out for the economic well being of society as a whole; in a free market, everyone looks out for their own well being.• Firms decide who to hire and what to make.• Adam Smith: Invisible hand• In any market, buyers look at the price when determining how much to demand and sellers look at the price when deciding how much to supply.• Market prices reflect both the value of a good to society and the cost to society of making the goodGovernments Can Sometimes Improve Market Outcomes• 2 reasons that government would intervene in the economy:-Promote efficiency-Promote equality• Governments can SOMETIMES improve market outcomes but not always!A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services• PRODUCTIVITY• In nations where workers can produce a large quantity of goods and services per unit of time, most people enjoy a high standard of living. • Growth rate of a nations productivity determines the growth rate of its average income.Prices Rise When the Government Prints Too Much Money• InflationSociety Faces a Short-Run Trade-off between Inflation and Unemployment• Most economists describe the short-run effects of monetary injections as follows:-Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.-Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services.-More hiring means lower unemployment.• Society faces a short-run trade-off between inflation and unemployment. Economists study:How people make decisionsHow much they workWhat they buyHow much they saveHow they invest their savingsHow people interact with one anotherAnalyze forces and trends that affect the economy as a
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