Chapter 1 TEN PRINCIPLES OF ECONOMICS
Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
Scarcity ( Management of Society’s Resources.
Economics is the study of how society manages its scarce resources. a. How people make decisions,
a. People Face Tradeoffs,
b. The Cost of Something is What You Give Up to Get It, c. Rational People Think at the Margin,
d. People Respond to Incentives.
b. How people interact,
a. Trade Can Make Everyone Better Off,
b. Markets Are Usually a Good Way to Organize Economic Activity, c. Governments Can Sometimes Improve Market Outcomes. c. How the economy as a whole works.
a. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services, b. Prices Rise When the Government Prints Too Much Money, c. Society Faces a Short-Run Tradeoff between Inflation and Unemployment
2. Tradeoffs of our lives.
No free lunch ( To get one thing that we like, we usually have to give up another thing that we like ( Tradeoff.
a. For every hour studying Econs, I give up an hour studying Maths. b. A family to spend income on holidays or to save as retirement funds. c. Guns vs. Butter ( National Defense vs. Consumer Goods. d. Modern Society ( Clean Environment vs. High Level of Income. e. Efficiency vs. Equity ( Size of Pie vs. How the Pie is Divided. i. Efficiency: the property of society getting the most it can from its scarce resources. ii. Equity: the property distributing economic prosperity fairly among the members of society. Implication of Tax: achieving greater equity but lower efficiency.
Understand Tradeoff ( Make Good Decision.
3. What is Opportunity Cost? Example.
Make Decision ( Comparing Cost and Benefit
a. Benefit: Intellectual Enrichment, Lifetime of Better Job Opportunity, Savings on Cheaper Room. b. Cost: Money spent on books, Time to work to earn money.
Opportunity Cost: What you give up to get that item.
4. Marginal Analysis.
Marginal Changes: Small incremental changes adjustments to a plan of action.
Example: Spending extra one year in school.
a. Benefit: Higher wage, Joy of learning.
b. Cost: Tuition fee, forgone wages.
5. Why should policymakers think about incentives?
Public policymakers should never forget about incentives, for many policies change the costs or benefits that people face and therefore alter behavior. If not, they often end up with results they did not intend.
Example: Tax on Petrol ( Encourage people to drive smaller cars ( Also encourage to take public transport ( Or even electric cars!!
6. Why isn’t trade among countries like a game, with some winners and some losers?
Because trade allows each person to specialize in the activities he or she does the best and to enjoy greater variety of goods and services.
7. What does the “invisible hand” of the marketplace do?
Market Economy: An economy that allocates resources through decentralized decisions of many firms and households as they interact in markets for goods and services.
Invisible hand leads them to desirable market outcomes. Prices are the instrument with which the invisible hand directs economic activity. Prices reflect both the value of a good to society and the cost to society of making the good.
Prices guide individual decision makers to reach outcomes that maximize the welfare of society as a whole.
Tax distorts prices ( distorts decisions of households and firms.
Invisible hand needs government to protect it because markets work only if property rights are enforced.
2 other reasons for a government to intervene in the economy: a. To promote efficiency,
b. To promote equity.
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