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Lecture_1 - TEN PRINCIPLES OF ECONOMICS Economics is the...

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TEN PRINCIPLES OF ECONOMICS Economics is the study of how society manages its scarce resources. TEN PRINCIPLES OF ECONOMICS 0. Society and Scarce Resources: 0. The management of society’s resources is important because resources are scarce. 1. Scarcity . . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have. TEN PRINCIPLES OF ECONOMICS A household and an economy face many decisions: 0. Who will work? 1. What goods and how many of them should be produced? 2. What resources should be used in production? 3. At what price should the goods be sold? HOW PEOPLE MAKE DECISIONS 1. People face trade-offs. MONEY IS NOT A TRADE-OFF. What you give up is the trade-off. 2. The cost of something is what you give up to get it. 3. Rational people think at the margin. 4. People respond to incentives. Principle #1: People Face Trade-offs. 5. To get one thing, we usually have to give up another thing. 0. Guns v. butter 1. Food v. clothing 2. Leisure time v. work 3. Efficiency v. equity Principle #1: People Face Trade-offs 6. Efficiency v. Equity 4. Efficiency means society gets the most that it can from its scarce resources. 5. Equity means the benefits of those resources are distributed fairly among the members of society.
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Principle #2: The Cost of Something Is What You Give Up to Get It. 7. Decisions require comparing costs and benefits of alternatives. 6. Whether to go to college or to work? OC=forgone income 7. Whether to study or go out on a date? 8. Whether to go to class or sleep in? 8. The opportunity cost of an item is what you give up to obtain that item. Principle #3: Rational People Think at the Margin. 9. Marginal changes are small, incremental adjustments to an existing plan of action. MARGIN- ONE MORE 10. The Margin refers to the next ONE: the next dollar spent, the next widget made -People make decisions by comparing costs and benefits at the margin Principle #4: People Respond to Incentives. 11. Marginal changes in costs or benefits motivate people to respond. -Getting people to get what you want them to. Getting people to change their mind at that margin mark. Such as keeping people moving in lines so they stay there and go on the rides 12. The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!
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