Econ 1 berkeley CH2

Topics: Economics / Pages: 4 (668 words) / Published: Feb 10th, 2015
Ten principles of economics
HOW PEOPLE MAKE DECISIONS
#1: People Face Tradeoffs
There is no such thing as free lunch. To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another.

#2: The Cost of Something Is What You Give Up to Get It
The opportunity cost of an item is what you give up to get that item. When making any decision, such as whether to attend college, decisionmakers should be aware of the opportunity costs that accompany each possible action. The most obvious opportunity cost of attending college is the amount of money you could have earned using college time.

#3: Rational People Think at the Margin
Decisions in life are rarely black and white but usually involve shades of gray. When it’s time for dinner, the decision you face is not between fasting or eating like a pig, but whether to take that extra spoonful of mashed potatoes. When exams roll around, your decision is not between blowing them off or studying 24hours a day, but whether to spend an extra hour reviewing your notes instead of watching TV.

#4: People Respond to Incentives
Because people make decisions by comparing costs and benefits, their behavior may change when the costs or benefits change. That is, people respond to incentives. When the price of an apple rises, for instance, people decide to eat more pears and fewer apples, because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples, because the benefit of selling an apple is also higher.

HOW PEOPLE INTERACT
#5: Trade Can Make Everyone Better Off
#6: Markets Are Usually a Good Way to Organize Economic Activity
#7: Governments Can Sometimes Improve Market Outcomes

HOW THE ECONOMY AS AWHOLEWORKS
#8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
#9: Prices Rise When the Government Prints Too Much Money
#10: Society Faces a Short-Run

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