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.Ten Principles of EconomicsHow people make decisions1. People face trade-offs2. The cost of something is what you give up to get it3. Rational people think at the margin4. People respond to incentivesHow people interact1. Trade can make everyone better off2. Markets are usually a good way to organize economic activity3. Governments can sometimes improve market outcomesHow the economy works as a whole1. A country’s standard of living depends on its ability to produce goods and services2. Prices rise when the government prints too much money3. Society faces a short-run trade-off between inflation and unemploymentEfficiency- The property of society getting the most it can from its scarce resourcesEquality- The property of distributing economic prosperity uniformly among the members of societyOpportunity Cost- Whatever must be given up to obtain some itemRational People- People who systematically and purposely do the best they can to achieve their objectivesMarginal Change- Small incremental adjustments to a plan of actionMarket Economy- An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and servicesProperty Rights- The ability of an individual to own and exercise control over scarce resourcesExternality- The impact of a persons actions on the wellbeing of a bystanderMarket Power- The ability of a single economic actor (or small group of actors) to have a substantial influence on market pricesProductivity- The quantity of goods and services produced from each unit of labor inputInflation- An increase in overall level of prices in an economyBusiness Cycle- Fluctuations in economic activity, such as employment and productionCHAPTER 1 SUMMARY1. The fundamental lessons about individual decision making are that people face trade-offs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face.2. The fundamental lessons about interactions among people are that trade and interdependence can be mutually beneficial, that markets are usually a good way of coordinating economic activity among people, and that the government can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality3. The fundamental lesson about the economy as a whole are that productivity is the ultimate source of living standards, that growth in the quantity of money is the ultimate source of inflation, and that society faces a short-run trade-off between inflation and unemployment.A Circular Flow Diagram- A visual model of the economy that shows how dollars flow through markets among households and firmsProductions Possibilities Frontier- A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technologyMicroeconomics- The study of how households and firms make decisions and how they interact in marketsMacroeconomics- The study of economy-wide phenomena including inflation, unemployment, and economic growthTwo types of economic analysis:Positive Statements are descriptive. They make a claim about how the world is.Normative Statements are prescriptive. They make a claim about how the world ought to beCHAPTER 2 SUMMARY1. Economists try to address their subject with a scientist’s objectivity. Like all scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular flow diagram and the production possibilities diagram.2. The field of economics is divided into two subfields: micro and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.3. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than as scientists.4. Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore it.The Production Possibilities Frontier (PPF) is a graph that shows the combination of output that the economy can produce given the available factors of production and the available production technologyThe opportunity cost of an item is whatever must be given up to obtain that item (The opportunity costs of two related goods are reciprocals)*For both parties to gain from trade, the price at which they trade must lie somewhere between the two opportunity costsThe producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that goodComparative advantage is the ability to produce a good at a lower opportunity cost than another producerChapter Basic Point: There are gains from trade and that at the heart of these gains from trade are the differences in opportunity cost, or comparative advantageMarginal Changes are small incremental changes to a plan of actionIndividuals and firms can make better decisions by thinking at the margin. A rational decision maker takes an action if and only if the marginal benefit is at least as large as marginal cost*The slope of a PPF is always the opportunity cost of the good on the x-axisMarket- A group of buyers and sellers of a particular good or serviceCompetitive Market- A market in which there are many buyers and sellers so that each has a negligible impact on the market pricePerfectly Competitive- To be perfectly competitive a market must have two qualities: The goods offered for sale are all exactly the same, and the buyers and sellers are so numerous that no single buyer or seller has any influence on the market price.DemandQuantity Demanded- The amount of a good that buyers are willing and able to purchaseLaw of Demand- The claim that,
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