Chapter 1:TEN principles of economicsScarcity: Society has limited resources and therefore cannot produce all the goods and services people wish to havePeople face tradeoffsEfficiency and equalityEfficiency: society is getting the maximum amount out of its scarce resourcesEquality: properly distributing economic prosperity uniformly among society’s membersEfficiency is the size of the economic pie while equality is how the pie is divided into individual slicesGreater equality reduces efficiencyThe cost of something you give up is what you getOpportunity cost: whatever must be given up to obtain some itemRational people think at the marginRational people: people who systematically and purposefully do the best they can to achieve their objectives.Marginal changes: describes small incremental adjustments to a plan of actionMargin=edge, marginal changes are adjustments around the edge of what your doingRational people make decisions by comparing marginal benefits to marginal costTakes action if marginal benefits exceed marginal costPeople respond to incentivesIncentive: something that induces a person to actPunishment or rewardTrade can make everyone better offTrade allows countries to do what they do best and enjoy a greater variety of goods and serviceMarkets are usually a good way to organize economic activityMarket Economy: An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and servicesFirms: decide whom to hire and what to makeHouseholds: decide which firms to work for and what to buy with their incomesNo one looks out for the economic well being of society as a wholeAdam SmithHouseholds and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomesWhen the government prevents the prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate decisions of the households and firms that make up the economyGovernments can sometimes improve market outcomesProperty rights: The ability for an individual to own and exercise control over scarce resourcesMarket economies need government institutions to enforce property rightsMarket failure: a situation in which a market left on its own fails to allocate resources efficiently.Possible cause of market failure is Externality: the impact of one person’s actions on the well-being of a bystanderEx) pollutionMarket power: the ability of a single economic actor to have a substantial influence on market prices.Market economy rewards people according to their ability to produce things that other people are willing to pay forThe invisible hand does not ensure that food, clothes, and healthcareThis inequality sometimes calls for government interventionA country’s standard of living depends on its ability to produce goods and servicesProductivity: the quantity of goods and services from each unit of labor inputDifference in living standards among various countries can be attributed to productivityRelationship between productivity and living standards influences public policyBoost productivity to increase living standardsPrices rise when the government prints too much moneyInflations: an increase on the overall level of prices in the economyMost cases the cause is: growth in the quantity of moneyLarge quantities of money make the value of it fallSociety faces a short run trade off between inflation and unemploymentIncreasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and servicesHigher 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 servicesMore hiring means lower unemploymentBusiness cycle: Fluctuations in economic activity, such as employment and productionpolicy members can exploit the short run tradeoffchanging the amount the government spends, taxes, printed moneyCONCLUSIONPeople face tradeoffsCost of any action is measured in forgone opportunitiesRational people make decisions by comparing marginal cost to marginal benefitsPeople change their behavior in response to the incentives they faceInteractions among peopleTrade and interdependence can be mutually beneficialMarkets are usually a good way to coordinate economic activity among peopleGovernment can improve market outcomes byRemedying market failurePromoting greater economic activityEconomy as a wholeUltimate source of living standardsGrowth in the quantity of money is the ultimate source of inflationSociety faces short term tradeoffs between inflation and unemploymentAPLIAScarcityThe condition in which human wants are forever greater than the available supple of time, goods, and resourcesScarcity affects not only individuals, but also the society as a wholeEfficiencyAn outcome is efficient when resources are used in a way that has fully exploited all opportunities to make everyone better offIn an efficient outcome no one can be made better off without making anyone worse offOutcome is inefficient if some people can be made better off without making others worse offOpportunity costWhen measuring opportunity cost in terms of dollars, you include:Actual amount paid (explicit cost) and monetary value of any other sacrifice (implicit cost)Opportunity cost in $ is sum of explicit and implicit costIncentivesPeople take purposeful action in acquiring things they wantAs a result, how goods are distributed influence how people actIf the distribution of goods isThinking like an economistThe scientific method: observation, theory, and more observationThe dispassionate development of testing theories about how the world worksAssumptionsEconomists make assumptions to simplify the complex world and make it easier to understandEconomic modelsEconomists use models to learn about the world in a simpler wayMost often composed of diagrams and equationsCircular flow diagram: A visual model of the economy that shows how dollars flow through markets among households and firms.Firms: produce goods and services using inputsInputs or (Factors of Production) are: labor, land, capital (buildings and machines)Households: own the factors of production and consume all the goods and services the firm producesHouseholds and firms interact in:Markets for goods and servicesHouseholds are buyers and firms are sellersHouseholds buy the output of
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