Exam 1 reading notes - Chapter 1 20:20 Scarcity the...

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Chapter 1 20:20 Scarcity- the limited nature of society’s resources Resources: human (labor), natural (land), capital (manufactured) Economics- the study of how society manages its scarce resources Most societies: resources are allocated not by an all-powerful dictator but through the  combined actions of millions of households and firms Four principles of individual decision making 1. People face trade-offs a. Efficiency vs equality a.i. Efficiency- the size of the economic pie a.ii. Equality- how the pie is divided into individual slices b. People are likely to make good decisions only if they understand the options  they have available c. Benefits vs costs 2. The Cost of Something is what you give up to get it a. Making decisions requires comparing the costs and benefits of alternative  courses of action b. Opportunity cost- whatever must be given up 3. Rational people think at the margin a. Rational People- people who systematically and purposefully do the best they  can to achieve their objectives b. Marginal changes- small incremental adjustments to a plan of action b.i. Rational people often make decisions by comparing marginal benefits  and marginal costs 4. People respond to incentives 3 principles concerning how people interact with one another
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1. Trade can make everyone better off a. By trading with others, people can buy a greater variety of goods and services  at lower cost b. Trade allows countries to specialize in what they do best and to enjoy a  greater variety of goods and services 2. Markets are usually a good way to organize economic activity a. Market economy- an economy that allocates resources through decentralized  decisions of many firms and households as they interact in markets for goods  and services b. Prices are the instrument with which the invisible hand directs economic  activity c. As a result of the decisions that buyers and sellers make, market prices reflect  both the value of a good to society and the cost to society of making the good 3. Governments can sometimes improve market outcomes a. The invisible hand can work its magic only if the government enforces the  rules and maintains the institutions that are key to a market economy b. Market economies need institutions to enforce property rights so individuals  can own and control scarce resources b.i. Property rights- the ability of an individual to own and exercise control  over scarce resources b.ii. Externality- the impact of one person’s actions on the well being of a  bystander (ex- pollution) b.iii. Market power- the ability of a single economic actor to have a substantial  influence on market prices
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This note was uploaded on 01/18/2012 for the course ECON 201 taught by Professor C.liedholm during the Summer '07 term at Michigan State University.

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Exam 1 reading notes - Chapter 1 20:20 Scarcity the...

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