Principles of Economics

Principles of Economics - Chapter One Economy-"One who...

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Chapter One Economy -“One who manages a household” Scarcity -the limited nature of society’s resources -A society cannot give every citizen the life style they might aspire to. Economics - is the study of how society manages its scarce resources. (The first four principles of economics is how people make decisions) Principle #1: People Face Tradeoffs Giving up one thing you like for another to achieve a goal. Examples How to spend your time. How to spend money. We spend money on national defense (guns) instead of on consumer goods (butter) Society faces the trade between efficiency and equity . Efficiency- the property of society getting the most it can from its scarce resources.(THE PIE) Equity- the property of distributing economic prosperity fairly among the members of society. (HOW THE PIE IS DIVIDED) Government policies of cause these two goals to conflict. Example When government redistributes wealth (graduated income tax motivates people to work less hard) It is less efficient the pie becomes smaller but it become more equitable. Principle #2 The Cost of Something is what you give up to get it 1. Need to consider all expenditures that would take place with either option 2. Take into consideration the time you are required to spend. You could have been working a job. Opportunity Cost- Whatever must be given up to obtain some item. High school athletes that could go pro or go to college understand how high their opportunity cost of going to college would be and often choose to go pro. Principle #3 Rational People Think at the Margin There are marginal benefits and costs The reason people are willing to pay much more for a diamond than a cup of water. The reason is that a person’s willingness to pay for any good is based on the marginal benefit that an extra unit of the good would yield. Marginal benefits depend on how many units a person already has.
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Extra water is not very beneficial because it is so plentiful. 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. Margin means “edge” So marginal changes are adjustments around the edges of what you are doing. Example The marginal cost of allowing standby customers to buy tickets below the cost of the expense to the airline is the cost of the peanuts and soda they drink. Because Otherwise the airline would just have empty seats. Principle #4: People Respond to Incentives Incentive- Something that induces a person to act Example A punishment or a reward. Placing a tax on gasoline causes people to drive smaller more fuel efficient cars Bad weather is an incentive to drive more slowly Car safety laws such as seatbelts are an incentive for drivers to drive faster. This incentive has an adverse effect because faster driving= more accidents with less deaths because of the safety. (The next three principles discuss how people interact with each other)
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Principles of Economics - Chapter One Economy-"One who...

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