Scarcity refers to the limited nature of society s resources heart of economics There is never enough of anything to satisfy all those who want it leads to need for decision making Ex limited money time decision of a person on how to spend these resources Decision Making principles thinking like an economist Every choice involves a tradeoff every action means you are giving something up The opportunity cost of any item is whatever must be given up to obtain it cid 127 making decisions requires comparing the costs and benefits of alternative options Rational decision making means to think at the margin comparing marginal costs to marginal benefits takes an action only if the benefits exceed the costs Thinking at the margin evaluate or calculate marginal costs and marginal benefits when making a decision Indoor outdoor tennis court option cid 127 marginal cost 0 cid 127 Marginal benefit is greater for this individual on an outdoor tennis court A sunk cost is a cost that has already been committed and cannot be recovered Thinking at the margin means ignoring sunk costs But do not ignore opportunity cost People respond to incentives Incentive something that induces a change in behavior causes or prevents and action Three Fundamental questions 1 What to produce 2 How to produce it 3 Who gets access to what is produced and services ex pollution cid 127 Market Economy is an economy that allocates resources through the decentralized decisions of firms and households as they interact in markets for goods cid 127 Market failure a situation in which a market left on its own fails to allocate resources efficiently one cause of market failure is externality the impact of one person s actions on the well being of a bystander another cause is market power the ability of a single economic actor or small group of actors to have substantial influence on market prices ex everyone in town needs water but there is only 1 well Owner of the well exhibits market power because he has no competition monopoly Circular flow model a visual model of the economy that shows how dollars flow through markets among households and firms cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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