Econ 200Chapter 1 – Ten Principles of Economics- Scarcity: 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- How people make decisions: how much they work, what they buy, how much they save, and how they invest their savingsHow People Make Decisions1. People Face Trade-offso To get one thing we like, we usually have to give up another thing that we like.o Ex. Time: if a student spends her time studying 1 subject, or divides it between multiple subjects, she gives up time she could be spending studying other subjects or even doing other activities, such as working, sleeping, or eating.o Another trade-off society faces is between efficiency and equality- Efficiency means that society is getting the maximum benefitsfrom its scarce resources.- Equality means that those benefits are distributed uniformly among society’s members.* Efficiency refers to size of economic pie, and equality refers to how the pie is divided into individual slices2. The Cost of Something is What You Give Up to get ito Opportunity cost: whatever must be given up to obtain an item3. Rational People Think at the Margino Rational People: people who systematically and purposefully do the best they can to achieve their objectives- Decisions in life are rarely black and white but usually involveshades of grayo Marginal changes: small incremental adjustments to a plan of actiono A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.-Explains why people are willing to pay more for diamonds than for water and why airlines are willing to sell a ticket below average cost4. People Respond to Incentiveso Incentive: something that induces a person to act, such as the prospect of a punishment or a rewardo Ex. When price of an apple rises, people decide to eat fewer apples. At the same time, apple orchards decide to hire more workers and harvest more apples. A higher price in market provides an incentive for buyers to consume less, and an incentive for sellers to produce more.How People Interact5. Trade Can Make Everyone Better Offo Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.o The Japanese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they areour competitors.6. Markets are Usually a Good Way to Organize Economic Activityo Communist countries worked on the premise that government officials were in the best position to control the economy’s scarce resourceso Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interactin markets for goods and serviceso Prices adjust to guide individual buyers and sellers to reach outcomes that maximize the well-being of society as a whole-Buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply7. Governments can Sometimes Improve Market Outcomeso Market economies need institutions to enforce property rights (the ability of an individual to own and exercise control over scarce resources) so individuals can own and control scarce resources.Ex. A farmer won’t grow food if he expects his crops to be stolen, a restaurant won’t serve meals unless it is assured that customers will pay before they leaveo Two broad reasons for a government to intervene in the economy andchange the allocation of resources that people would choose on their own Goal of efficiency: --Market failure refers to a situation in which the market on its own fails to produce an efficient allocation of resources.-One possible cause of market failure is externality, which is the impact of one person’s actions on the well being of a bystander. (Example: pollution)-Another possible cause of market failure is market power, which refers to the ability of a single person to unduly influence market prices. (Example: If everyone in town needs water, but there is only one well, the owner of the well is not subject to rigorous competition) Goal of equality:--A market economy rewards people according to their ability to produce things that other people are willing to pay for. (Example: The world’s best basketball player earns more than the world’sbest chess player simply because people are willing to pay more towatch basketball than chess.)--The market system alone does not ensure that everyone has sufficient food, decent clothing, and adequate healthcare. This inequality may call for government intervention. (Example: income tax and welfare system)How the Economy as a Whole Works8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Serviceso Almost all variation in living standards is attributable to differences incountries’ productivity (the quantity of goods and services produced from each unit of labor input) 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 The growth rate of a nation’s productivity determines the growth rate of its average incomeo 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 the Government Prints Too Much Moneyo Inflation: an increase in the overall level of prices in the economyo *Inflation is a problem!*o Causes: Growth in quantity of money; when a government creates large quantities of the nation’s money, the value of the money falls.10. Society Faces a Short-Run Trade-Off between Inflation and Unemploymento Short-run effects of monetary injections:-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 inthe meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services-More hiring means less unemploymento Society faces a short-run trade-off between inflation and unemployment means that, over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.o The short-run tradeoff plays a key role in the
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