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LU 1: Introduction of Economic (Ten Principles of Economics (People Face…
LU 1: Introduction of Economic
What is Economic?
Economics is the study of how society manages its scarce resources.
Ten Principles of Economics
People Face Trade-offs.
The Cost of Something Is What You Give Up to Get It.
Rational People Think at the Margin
People Respond to Incentives.
Trade Can Make Everyone Better Off.
Markets Are Usually a Good Way to Organize Economic Activity.
Society Faces a Short-run Trade-off between Inflation and Unemployment.
Prices Rise When the Government Prints Too Much Money.
A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Governments Can Sometimes Improve Market Outcomes.
Who is The Legacy of Adam Smith and David Rica
Adam Smith
In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith performed a detailed analysis of trade and economic interdependence, which economists still adhere to today.
David Ricardo
In his 1816 book Principles of Political Economy and Taxation, David Ricardo developed the principle of comparative advantage as we know it today.
Economic Models
The Circular Flow Diagram
A visual model of the economy that shows how dollars flow through markets among households and firms.
Firms
Produce and sell goods and services
Hire and use factors of production
Households
Buy and consume goods and services
Own and sell factors of production
Markets for Goods and Services
Firms sell
Households buy
Markets for Factors of Production
Households sell
Firms buy
Factors of Production
Inputs used to produce goods and services
Capital, land, labor
The Production Possibilities Frontier
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Concepts illustrated by the production possibilities frontier
Efficiency
Trade-offs
Opportunity cost
Economic growth
