Chapter 1 Notes: 10 Principles of Economics
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Economy comes from the greek word oikonomos
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One who manages the household
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Scarcity: society has limited resources and therefore cannot produce all the goods and
services people wish to have.
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Economics: the study of how society manages its scarce resources
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Economist study how people make decisions, how much they work, what they buy, how
much they save, etc
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Determine how the multitude of buyers and sellers of a good determine the price
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Analyze forces and trends that affect the economy has a whole
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Growth in avg income
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Fraction of the pop that cant find work
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Rate which prices are rising
How People Make Decisions
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Behavior of the economy reflects the behavior of the individual who makes up the
economy
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4 principles of decision making
Principle 1: People face Trade-offs
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Making decisions requires trading off one goal against another
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When people are grouped into societies they face diff kinds of trade-offs
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“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
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Clean env and a high level of income
Laws that require firm s to reduce pollution raise the cost of producing goods and
services
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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
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Trade-offs don’t tell us what decisions people will/will not make
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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
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Making decisions requiring the costs and benefits of alternative courses of action
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Opportunity cost: whatever must be given up to obtain some item
Principle 3: Rational People think at the margin
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Economists assume people are rational
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Rational people systematically and purposefully do the best they can to achieve their
objectives, given the opportunities they have
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Know decisions are gray/white
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Marginal Changes: small incremental adjustments to an existing plan of action
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Margin means edge
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Marginal changes are adjustments around the edges of what you are doing
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Rational people make decisions by comparing marginal benefits and marginal costs
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Marginal Decisions
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Why is water so cheap, while diamonds are so expensive?
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- Fall '06
- WISSINK
- Economics, economic activity
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