CHAPTER SUMMARIES - CHAPTER SUMMARIES Chapter 1 1.All...

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CHAPTER SUMMARIES Chapter 1 1.All economic analysis is based on a list of basic principles. These principles apply to three levels of economic understanding. First, we must understand how individuals make choices; second, we must understand how these choices interact; and third, we must understand how the economy functions overall. 2.Everyone has to make choices about what to do and what not to do. Individual choice is the basis of economics. 3.The reason choices must be made is that resources —anything that can be used to produce something else—are scarce . 4.Because you must choose among limited alternatives, the true cost of anything is what you must give up to get it— all costs are opportunity costs. 5.Many economic decisions involve questions not of “whether” but of “how much. Such decisions must be taken by performing a trade-off at the margin—by comparing the costs and benefits of doing a bit more or a bit less. Decisions of this type are called marginal decisions , and the study of them, marginal analysis , plays a central role in economics. 6.The study of how people should make decisions is also a good way to understand actual behavior. Individuals usually exploit opportunities to make themselves better off. If opportunities change, so does behavior: people respond to incentives . 7. Interaction —that my choices depend on your choices, and vice versa, adds another level to economic understanding. 8.The reason for interaction is that there are gains from trade : by engaging in the trade of goods and services with one another, the members of an economy can all be made better off. Underlying gains from trade are the advantages of specialization , of having individuals specialize in the tasks they are good at. 9.Economies normally move toward equilibrium —a situation in which no individual can make himself or herself better off by taking a different action. 10.An economy is efficient if all opportunities to make some people better off without making other people worse off are taken. Efficiency is not the sole way to evaluate an economy: equity, or fairness, is also desirable. There is often a trade-off between equity and efficiency. 11.Markets usually lead to efficiency, with some well-defined exceptions. 12.When markets fail and do not achieve efficiency government intervention can improve society’s welfare. 13.One person’s spending is another person’s income. 14.Overall spending in the economy can get out of line with the economy’s productive capacity, leading to recession or inflation. 15.Governments have the ability to strongly affect overall spending, an ability they use in an effort to steer the economy between recession and inflation.
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