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Chapter 1Chapter 1 Ten Principles of Economics WHATS NEW: The discussions of Principle #4, People respond to incentives, Principle #7, Governments can sometimes improve market outcomes, and Principle #10, Society faces a short-run tradeoff between inflation and unemployment have been shortened. A definition for the term business cycle has been added. A new FYI box on How to Read This Book has been added and provides students with tips on studying. LEARNING OBJECTIVES: By the end of this chapter, students should understand: that economics is about the allocation of scarce resources. that individuals face tradeoffs. the meaning of opportunity cost. how to use marginal reasoning when making decisions. how incentives affect peoples behavior. why trade among people or nations can be good for everyone. why markets are a good, but not perfect, way to allocate resources. what determines some trends in the overall economy. 1 1 TEN PRINCIPLES OF 2 Chapter 1/Ten Principles of Economics CONTEXT AND PURPOSE: Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to the text. Chapter 1 introduces ten fundamental principles on which the study of economics is based. In a broad sense, the rest of the text is an elaboration on these ten principles. Chapter 2 will develop how economists approach problems while Chapter 3 will explain how individuals and countries gain from trade. The purpose of Chapter 1 is to lay out ten economic principles that will serve as building blocks for the rest of the text. The ten principles can be grouped into three categories: how people make decisions, how people interact, and how the economy works as a whole. Throughout the text, references will be made repeatedly to these ten principles. KEY POINTS: 1. The fundamental lessons about individual decisionmaking are that people face tradeoffs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face. 2. The fundamental lessons about interactions among people are that trade can be mutually beneficial, that markets are usually a good way of coordinating trades among people, and that the government can potentially improve market outcomes if there is some sort of market failure or if the market outcome is inequitable.... View Full Document

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