Macro Economics - Ten Principles of Economics

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Economics Chapter One: Ten Principles of Economics

Scarcity – the limited nature of society’s resources
Economics – the study of how society manages its scarce resources

Principle #1: People Face Tradeoffs
Making decisions requires trading off one goal against another A dollar/unit of time spent on one thing is one less dollar/unit of time less spent on another Common trade offs include: “butter for guns”, a clean environment or a high level of income & Efficiency – the property of society getting the most it can from its scarce resources. Or Equity – the property of distributing economic prosperity fairly among the members of society Efficiency = the size of the economic pie, Equity = how the pie is divided

Principle #2: The Cost of Something Is What You Give Up to Get It Because people face tradeoffs, making decisions requires comparing the costs and benefits of alternate courses of action. Opportunity Cost – What ever must be given up to obtain some item.

Principle #3: Rational People Think as the Margin
Rational People – people who systematically and purposefully do the best they can to achieve their objectives Marginal Changes – small incremental adjustments to a plan of action Marginal means “edge” – marginal changes are changes around the edges of what you are doing Rational people often make decisions by comparing marginal benefits & marginal costs A person’s willingness to pay for any good is based on the marginal benefit those extra units of the good will yield. The marginal benefit depends on how many units a person already have. A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.

Principle #4: People Respond to Incentives
Incentive – something that induces a person to act (punishment or reward) The benefit of selling a product is higher, so sellers hire more workers and produce more products, where as a buyer will buy more product at a lower price...
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