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Unformatted text preview: ts 7 How People Make Decisions Principle 4: People respond to incenMves IncenMve Something that induces a person to act Higher price Buyers - consume less Sellers - produce more Public policy Change costs or benefits Change people s behavior 8 How People Make Decisions Principle 4: People respond to incenMves Gasoline tax Car size & fuel efficiency; carpool; public transportaMon Unintended consequences Policymakers fail to consider how their policies affect incenMves 9 How People Interact Principle 5: Trade can make everyone beder off Trade SpecializaMon Allows each person/country to specialize in the acMviMes he/she does best People/countries can buy a greater variety of goods and services at lower cost 10 How People Interact Principle 6: Markets are usually a good way to organize economic acMvity Communist countries central planning Government officials (central planners) Allocate economy s scarce resources Decided What goods & services were produced How much was produced Who produced & consumed these goods & services Theory: only the government could organize economic acMvity to promote economic well- being for the country as a whole 11 How People Interact Principle 6: Markets are usually a good way to organize economic acMvity Market economy - allocates resources Decentralized decisions of many firms and households As they interact in markets for goods and services Guided by prices (INCENTIVES) and self interest Adam Smith s invisible hand 12 How People Interact Principle 7: Governments can someMmes improve market outcomes We need government Enforce the rules Maintain insMtuMons - key to mar...
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- Spring '08