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KWCh_01_Interaction_How_Economies_Work - chapter 1 > First...

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>> First Principles Section 2: Interaction: How Economies Work chapter 1 As we learned in the Introduction, an economy is a system for coordinating the productive activities of many people. In a market economy, such as the one we live in, that coordination takes place without any coordinator: each individual makes his or her own choices. Yet those choices are by no means independent of each other: each individual’s opportunities, and hence choices, depend to a large extent on the choices made by other people. So to understand how a market economy behaves, we have to examine this interaction in which my choices affect your choices, and vice versa. When studying economic interaction, we quickly learn that the end result of indi- vidual choices may be quite different from what any one individual intends. For example, over the past century farmers in the United States have eagerly adopted new farming techniques and crop strains that have reduced their costs and increased their yields. Clearly, it’s in the interest of each farmer to keep up with the latest farming techniques. But the end result of each farmer trying to increase his or her own income has actually been to drive many farmers out of business. Because American farmers have been so successful at producing larger yields, agricultural Interaction of choic- es—my choices affect your choices, and vice versa—is a feature of most economic situa- tions. The results of this interaction are often quite different from what the individuals intend.
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prices have steadily fallen. These falling prices have reduced the incomes of many farmers, and as a result fewer and fewer people find farming worth doing. That is, an individual farmer who plants a better variety of corn is better off; but when many farmers plant a better variety of corn, the result may be to make farmers as a group worse off. A farmer who plants a new, more productive corn variety doesn’t just grow more corn. Such a farmer also affects the market for corn through the increased yields attained, with consequences that will be felt by other farmers, consumers, and beyond. Just as there are four economic principles that fall under the theme of choice, there are five principles that fall under the theme of interaction. These five principles are summarized in Table 1-2. We will now examine each of these principles more closely. There Are Gains from Trade Why do the choices I make interact with the choices you make? A family could try to take care of all its own needs—growing its own food, sewing its own clothing, pro- viding itself with entertainment, writing its own economics textbooks. But trying to live that way would be very hard. The key to a much better standard of living for every- one is trade , in which people divide tasks among themselves and each person pro- vides a good or service that other people want in return for different goods and services that he or she wants. The reason we have an economy, not many self-sufficient individuals, is that
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KWCh_01_Interaction_How_Economies_Work - chapter 1 > First...

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