* The management of society’s resources is important because resources are scarce. * Scarcity refers to the limited nature of society’s resources. * Economics involves the study of how society manages its scarce resources * In most societies, resources are allocated through the combined decisions and actions of millions of households and firms. * Hence, economists must study:
1) How people make decisions
2) How they interact with one another
3) Forces and trends that affect the economy as a whole
10 Principles of economics
The behavior of an economy reflects the behavior of individuals that make up the economy. Hence, we begin our study of economics with the four principles of individual decision-making.
Princple 1: People face trade offs
* Making decisions require trading off one goal against another. * Example: For every hour a student studies one subject, she gives up an hour she could have used studying the other. * One of the main trade-off that society faces is between efficiency and Equality. * Efficiency refers to the property of society getting the most out of its scarce resources. * Equality refers to the property of distributing economic prosperity uniformly among the members of the society. * Example: Welfare systems or unemployment insurance-policies designed to improve equality but end up reducing efficiency.
Principle 2: Opportunity costs
* Because people face trade offs, making decisions require comparing the costs and benefits of alternative courses of actions. Hence, opportunity costs comes in. * Opportunity cost by definition is the next best alternative forgone when a choice is made. I.e. it is whatever that must be given up to obtain some item. * E.g. Lebron james going to school instead of NBA.
Principle 3: Rational People think at the margin
* Rational People are people who systematically and purposefully...