• 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 • 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• marginal cost= $0• 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 questions1. What to produce?2. How to produce it?3. Who gets access to what is produced?• Market Economy- is an economy that allocates resources through the decentralized decisions of firms and households as they interact in markets for goodsand services.• 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.• ex:pollution• 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
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