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

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

 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?