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Unformatted text preview: Micr oeconomics -RUBIN Chapter 1 Ten Principles of Economics Scarcity The limited nature of societys resources Society has a limited amount of recourses and therefore cannot produce all the goods and services people wish to have. Economics Is the study of how society manages its scarce resources? Principle 1: People Face Trade-Offs to get one thing we like, we usually have to give up another thing we like Example: "guns and butter,"more uses of national defense the less it can spend on consumer goods. Equality - the property of distributing economic prosperity uniformly among the member of society. o Benefits are distributed uniformly among society's members o How the pie is divided into individuals slices Efficiency- the property of society getting the most it can from its scarce resources, o society is getting the maximum benefits from its scarce resources o size of the economic pie Principle 2: The Cost of Something is What You Give Up to Get It Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. Opportunity Cost - Whatever must be given up to obtain some item Principle 3: Rational People Think at the Margin Rational People- People who systematically and purposefully do the best they can to achieve their objectives. o Example: you will encounter firms that decide how many workers to hire and how much of their products to manufacture and sell to maximize profits Marginal Changes- Small incremental adjustments to a plan of action o Margin means 'edge,' so marginal changes are adjustments around the edges of what you are doing. o Marginal Cost and Marginal Benefits. Principle 4: People Respond to Incentives Incentive- something that induces a person to act o Such as prospect of a punishment of a reward Principle 6: Trade Can Make Everyone Better Off Trade off / w two countries can make each country better off Everyone is better off when they trade Principle 7: Markets Are Usually a Good Way to Organize Economic Activity Market Economy- An economy that allocated resources through the decentralized decisions of many firms and household as they interact I markers for goods and services o The decisions of a central planner are replaces by the decisions of millions of firms and Household. Firms decide whom to hire and what to make Households decide which frrms to work for and what to buy with their incomes o These frrms ad house hold interact In the marketplace , where prices and self-interest guide their decisions Adam Smith observed in all of economics: Households and Firms interacting in markets act as if they are guided by an 'invisible hand" that leads them to desirable markets outcomes....
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- Spring '09