EC 10a NOTES Chapter 1 : The Ten Principles of Economics • The fundamental lessons about individual decision making are that people face tradeoffs among alternatives goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face. • The fundamental lessons about interactions among people are that trade and interdependence can be mutually beneficial, that markets are usually a good way of coordinating economic activity among people, and that the government can potentially improve market outcomes by remedying a market failure of by promoting greater economic equality. • The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that growth in the quantity of money is the ultimate source of inflation, and that society faces a shortrun tradeoff between inflation and unemployment. KEY CONCEPTS: Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the
highest standard of living to which he or she might aspire. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by an allpowerful dictator but through the combined actions of millions of households and firms. Economists therefore study how people make decisions, interact with one another, and analyze forces and trends that affect the economy as a whole. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society’s members. o Equalizing the distribution of economic wellbeing o When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods. Opportunity Cost is what ever must be given up to obtain some item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action. Rational People systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. Marginal change is a small incremental adjustment to an existing plan of action. Rational people often make decisions by comparing marginal benefits to marginal costs.
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