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*PPT SLIDESHOWS, RECORDING MAFE, APLIA H.W’S, PICS IPHONE CHAPTER 1 TEN PRINCIPLES OF ECONOMICS Economy: Greek term (one who manages a household) -Household + economies have much in common Households face many decisions -Allocate scarce resources o ability, effort & desire Society faces many decisions -Allocate resources + outputs Resources are scarce Scarcity : the limited nature of society’s resources -Society has limited resources and therefore cannot produce all the goods and services people wish to have Economics: how society manages its scarce resources & how people make decisions Economist study: -How people make decisions (work, buy, save, invest) -How people interact with one another -Analyze forces & trends that affect the economy as a whole: a) Growth in average income b) Fraction of the population that cannot find work c) Rate at which prices are rising HOW PEOPLE MAKE DECISIONS PRINCIPLE 1: to get something we like, we usually have to give up something “They ain’t not such thing as free lunch” Trade-offs: -students: time -parents: income -society: national defense vs. consumer foods (guns vs. butter), efficiency vs. equality, clean environment vs. high level of income Efficiency: society getting the maximum benefits from its scarce resources -size of the economic pie Equality: distributing economics prosperity uniformly among the members of the society -how the pie is divided into individual pies *THERE ARE ALWAYS CONSEQUENCES ON DECISIONS! Example: 2 daughter with only two years apart -jeans: buy more to older one and passing the jeans to young sister (efficiency) -buying also jeans at the youngest one (equality) HOW PEOPLE MAKE DECISIONS PRINCIPLE 2: the cost of something is what you have to give up to get it People face trade-offs: make decisions -compare cost with benefits of alternatives Opportunity cost: whatever must be given up HOW PEOPLE MAKE DECISIONS
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PRINCIPLE 3: rational people think at the margin Rational people: systematically and purposefully do the best they can to achieve their objectives Marginal changes: small incremental adjustments to a plan of action Rational decision maker: make decisions by comparing marginal benefits and marginal cost *take action only if: marginal benefits > marginal costs HOW PEOPLE MAKE DECISIONS PRINCIPLE 4: people respond to incentives Incentives: something that induces a person to act -higher price: *buyers: consume less *sellers: produce more -public policy: *change costs or benefits *change people’s behavior HOW PEOPLE INTERACT PRINCIPLE 5: the trade can make everyone better off Trade: allows each person to specialize in the activities he or she does best *Enjoy a greater variety of goods and services at lower cost HOW PEOPLE INTERACT PRINCIPLE 6: markets are usually a good way to organize economic activity Communist countries, central planning (government) Market economy, allocation of resources -Guided by prices and self interest -As they interact in markets for goods and services
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