Chapter 1 Notes - Chapter 1 Notes 10 Principles of...

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Chapter 1 Notes: 10 Principles of Economics Economy comes from the greek word oikonomos o One who manages the household Scarcity: society has limited resources and therefore cannot produce all the goods and services people wish to have. Economics: the study of how society manages its scarce resources Economist study how people make decisions, how much they work, what they buy, how much they save, etc Determine how the multitude of buyers and sellers of a good determine the price Analyze forces and trends that affect the economy has a whole o Growth in avg income o Fraction of the pop that cant find work o Rate which prices are rising How People Make Decisions Behavior of the economy reflects the behavior of the individual who makes up the economy 4 principles of decision making Principle 1: People face Trade-offs Making decisions requires trading off one goal against another When people are grouped into societies they face diff kinds of trade-offs o “guns and butter” (classic) The more we spend on national defense (guns) to protect our shores, the less we spend on consumer goods (butter) to raise our standard of living o Clean env and a high level of income Laws that require firm s to reduce pollution raise the cost of producing goods and services o Efficiency and equity Efficieny: society is getting the max benefits from its scarce resources
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Equity: those benefits are distributed fairly among societys members When gov policies are designed these two goals conflict For example see pg 5 Trade-offs don’t tell us what decisions people will/will not make Acknowledging trade-offs is imp b/c ppl are likely to make good decisions If they understand the options that they have available Principle 2: The Cost of Something is What you give up to get it Making decisions requiring 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 Economists assume people are rational Rational people systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have o Know decisions are gray/white Marginal Changes: small incremental adjustments to an existing plan of action o Margin means edge o Marginal changes are adjustments around the edges of what you are doing o Rational people make decisions by comparing marginal benefits and marginal costs Marginal Decisions o Why is water so cheap, while diamonds are so expensive?
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