Chpt 1 Principles of Econ Econ a social science it uses a set of principles or propositions to analyze human behaviors Why study econ Resources are scarce 10 Principles p1 7 Principle 1 People face trade offs There is no such thing as free lunch Examples Thanksgiving Black FRIDAY 10 off a tv stay in line get 50 dollars off Hourly wage 10 dollars therefore could have worked 5 hours to get 50 dollars TIME is a scarce resource not worth it unless your hourly wages is less than 10 dollars Money is also scarce resource buy the newest iphone vs saving it Clean air vs higher income less regulated environmental laws higher factory income for shareholder or high regulation vs lower income eg Cancer village in China sacrifice health for income Efficiency vs equity Could have make the size of pie bigger invest money in research fund Size of pie vs how we divide up the pie unemployment benefits food stamps scholarships to send people to school library Just because car produce CO2 cant just abandon car key is to find optimal TRADEOFF balance between the two Principle 2 The cost of something is what you give up to get it NOT only accounting cost generally opportunity cost whatever you must be given up in order to obtain something else Examples Seahawks stay in line for 2 weeks get 1 seahawks tickets 300 weekly salary is 400 could have worked to by it Depend on how much you work Opportunity cost to get free ticket is 400 dollar salary not getting free 300 dollars Principle 3 Rational people think at the margin Economics ASSUME people are rational and rational people make decisions on marginal benefits MB and marginal cost MC MB Marginal change is a small incremental adjustment to a plan of action eg Pizza each piece is 3 marginal cost after you are full you would probably get another piece if it cost 1 marginal benefit Probably not going to get the 6th piece We don t make decision of overall benefit make decision on what the next piece is going to cost us Water vs diamond Paradox water essential resource is cheap but diamonds not needed is expensive Answer there are plenty of water willingness to pay next unit of water is low Diamond are not seen a lot in general willingness to pay next unit of diamond is high People s willingness to pay for a good is based on the marginal benefit that an extra unit of good would yield pizza example And marginal benefit in turn depends on how many units a person already has marginal benefit of first piece is higher than of the 6th Eg Htc 1 700 willing to pay 700 for first phone but not willing to pay 700 for second phone willing to pay 50 for second identical phone Principle 4 People respond to incentives Incentives something that induces a person to act such as punishment or reward Examples Only 1 final exam that counts as 100 people probably wont go to class Incentive 100 final exam grade Steering toward not wanting students to show up in class People respond to prices if seahawks price increase less people would go Starbucks cost more less people would buy Incentive price Price of gasoline is dropping people s willingness to pay for electronic car would drop drop in gasoline would increase willingness to travel by car Principle 5 Trade can make everyone better off Examples use your tradings for money If money is only a piece of paper you cant trade Trade can make everyone better off Principle 6 Markets are usually a good way to organize economic activity Market economy an economy that allocates resources through decentralized divisions and household as they interact in market for goods and services Opposite of Market economy centralized planning Eg Cuba Soviet Union Price medium reflects the costs of goods reflects consumer s willingness to pay Principle 7 government can sometimes improve market outcome When market outcome fails government can step in Establish and enforce property right so an individual can own and control resources Property Right the right to own something Market fails sometimes externality impact of one person s action on the well being of a bystander Eg Negative externality Air pollution from a factory affect bystanders and people around factory factory does not have to pay for emission of pollution Government can levy tax or regulations Positive externality Inventions computers invented by A which benefit people not in the trade B C D could steal idea and built computers Person A would be discouraged Government could create laws to protect A s idea copy right patents Another eg Monopoly chpt 13 Why is monopoly bad Has the market power to influence price If there s only one airline company can mark up price and increase price damages consumer surplus willingness to pay drop Break up more competitions 2 airplane company with diff cost Government can see if a firm is monopoly if it is can break them up Chapter One Study Guide Principle 1 People faces tradeoff Give up something for another Efficiency society is getting the maximum benefits from its scarce resources Equality benefits are distributed uniformly among society s members Principle 2 The Cost of Something Is What You Give Up to Get It Principle 3 Rational People Think at the Margin Marginal change a small incremental adjustment to an existing plan of action Principle 4 People Respond to Incentives Incentives something such as a prospect of a punishment or reward that induces a person to act Principle 5 Trade Can Make Everyone Better Off Principle 6 Markets Are Usually a Good Way to Organize Economic Activity Market Economy an economy where the decisions of a central planner are replaced by the decisions of millions of firms and households Principle 7 Governments Can Sometimes Improve Market Outcomes Property right right for individuals to own property Principle 8 A Country s Standard of Living Depends on Its Ability to Produce Goods and Services Productivity the amount of goods and services produced by each unit of labor input Principle 9 Prices Rise When the Government Prints Too Much Money Inflation an increase in the overall level of prices in the economy Principle 10 Society Faces a Short Run Trade off between Inflation and Unemployment Business cycle the irregular and largely unpredictable fluctuations in economic activity as measured by the production of goods and services or the number of people employed Market power the ability of a single economic actor or small group of actors to have a substantial influence on market prices Externality the impact of one person s