Chapter 1 10 Principles of Economics 1 People Face Trade Offs more society spends on national defense guns less it can spend on consumer goods butter to raise the standard of living efficiency property of society getting the most it can from its scarce resources equality property of distributing economic prosperity uniformly among a society 2 Cost is What You Give Up 3 Rational People Think at the Margin opportunity cost whatever must be given up to obtain an item rational people purposely do the best they can to achieve their objectives marginal changes small adjustments to a plan of action Rational people often make decisions by comparing marginal benefits and marginal costs marginal benefit depends on how many units a person already has 4 People Respond to Incentives incentive something that induces a people to act 5 Trade Can Make Everyone Better Off By trading with others people can buy a greater variety of goods and services at lower cost Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services 6 Markets are a Good Way to Organize Economic Activity market economy allocates resources thru decentralized decisions of many firms as they interact in markets market economies have proven remarkably successful in organizing economic activity to promote overall Households and firms interacting in markets act as if they are guided by an invisible hand that leads them to economic well being desirable market outcomes 7 Gov ts can Sometimes Improve Market Outcomes property rights ability of an individual to own exercise control over resources market failure market left on its own fails to allocate resources efficiently externality uncompensated impact of one person s actions on the well being of a bystander market power ability of a single economic actor to have a substantial influence on market prices 8 Standard of Living Depends on Production productivity quantity of goods services produced from each unit of labor To boost living standards policymakers need to raise productivity by ensuring that workers are well educated have the tools needed to produce goods and services and have access to the best available technology 9 Prices Rise When Gov t Prints Too Much Money inflation increase in the overall level of prices in the economy When a government creates large quantities of the nation s money the value of the money falls 10 Society Faces Trade off between Inflation Unemployment 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 Business cycle fluctuations in economic activity ex employment production
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