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Unformatted text preview: Econ200 Txtbk Notes Chapter1 Economy: comes from Greek phrase “one who manages a household” • Society must allocate people to various jobs and allocate the amount of goods and services that it produces, like a house must allocate how to employ its few people living in it to the various jobs around the home. Scarcity : Society has limited resources and cannot produce all the goods and services that people want. Economics : The study of how society manages its scarce resources. • Economists study how people make decisions such as how much they work and what they buy. They study the relationships btwn people, like buyers and sellers. And they study trends that affect the economy, such as the growth in average income or unemployment rates. 10 PR INC IPLES: How I ndividuals Make Decisions 1: People Face Trade Offs:- To get something we like, we give up something we like - Example: choosing to spend money on one good or service gives up the money you could be spending on another good or service. (How does a family spend their income?) - Efficiency vs. Equality : o Obtaining maximum benefits from scarce resources OR distributing the benefits uniformly among society’s members. 2: The Cost Of Something Is What You Give Up To Get It: - Decisions require comparing the cost and benefits of alternative courses of - Example: Is the cost of going to college (giving up your time that could be spent getting a job) worth the value of an education? - Opportunity Cost : What you give up to obtain a certain item. 3: Rational People Think at The Margin:- Doing the best one can to achieve his or her objectives, give the available opportunities- Example: Firms deciding how many workers to hire and how much of their products to manufacture/sell to maximize profit- Ma rginal Changes : small incremental adjustments to an existing plan of action.- Rational decision makers take an action only if the marginal benefit of the action exceeds the marginal cost. 4: People Respond to Incentives:- I ncentives induce a person to act, such as the prospect of a punishment or reward- Example: a higher market price gives customers an incentive to buy less- If policy changes incentives, people feel obligated to alter their behavior.- Example: Seatbelt law is an incentive for people to drive faster because they believe that their survival rate in an accident is lower. How People Interact 5: Trade Can Make Everyone Better Off:- Trade between countries is not negative competition- Allows for specialization in activities people do best- Trading allows people to buy a greater variety of goods and services at lower 6: Markets Are Usually A Good way to Organize Economic Activity:- Market Economies allow for decisions of a central planner to be replaced by the decisions of millions of firms and households....
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This note was uploaded on 02/14/2011 for the course ECON 200 taught by Professor Vincent during the Fall '08 term at Maryland.
- Fall '08