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Learning Unit 1:Introduction to Economics (The Circular Flow of Dollars…
Learning Unit 1:Introduction to Economics
The Circular Flow of Dollars
MARKETS FOR GOODS AND SERVICES
-Firms sell and households buy goods and services
Spending
HOUSEHOLDS
-Buy and consume goods and services
-Own and sell factors of production.
Income
MARKETS FOR FACTORS OF PRODUCTION
-Households sell and firms buy factors of production.
Wages, rent, and profit
FIRMS
-Produce and sell goods and services
-Hire and use factors of production.
Revenue
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-Economics is the study of how society manages its scarce resources.
-The word economy comes from a Greek word for "one who manages a household".
Ten Principles of Economics
Principle 1: People Face Trade-offs
-To get one thing, we have to give up another thing.
Principle 2: The cost of Something Is What You Give Up to Get It.
-Decisions require comparing costs and benefits of alternatives.
-The opportunity cost of an item is what you give up to obtain the another item.
Principle 3: Rational People Think at the Margin.
-Marginal changes are small, incremental adjustments to an existing plan of action.
Principle 4: People Respond to Incentives.
-The decision to choose one alternative over another occurs when that alternative's marginal benefits exceed its marginal costs.
Principle 5: Trade Can Make Everyone Better Off.
-People gain from their ability to trade with one another.
-Competition results in gains from trading.
-Trade allows people to specialize in what they do best.
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity.
-A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in market for goods and services.
Principle 7: Governments Can Sometimes Improve Market Outcomes.
-Markets work only if property rights are enforced.
-Property rights are the ability of an individual to own and exercise control over a scarce resource.
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The Circular Flow of Inputs and Outputs
MARKETS FOR GOODS AND SERVICES
-Firms sell and households buy goods and services.
Goods and services bought
HOUSEHOLDS
-Buy and consume goods and services.
-Own and sell factors of production.
Labor, land, and capital
MARKETS FOR FACTORS OF PRODUCTION
-Households sell and firms buy factors of production.
Factors of production
FIRMS
-Produces and sell goods and services.
-Hire and use factors of production.
Goods and services sold
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