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Chapter 1 Introduction to Economics (10 Principles of Economics (Trade can…
Chapter 1 Introduction to Economics
Economy comes from the Greek word
oikonomos
which means 'one who manages a household'
Economics is the study of how society manages its scarce resources to satisfy human unlimited wants
10 Principles of Economics
Trade can make everyone better off
Markets are usually a good way to organize economic activity
People respond to incentives
Governments can sometimes improve market outcomes
Rational people think at the margin
A country's standard of living depends on its ability to produce goods and services
The cost of something is what you give up and get it
Prices rise when government prints too much of money
People face trade-offs
Society faces a short-run trade-off between inflation and unemployment
Thinking Like an Economist
The Economist as a
Policy Adviser
Normative Statements = Prescriptive Analysis
are statements about how the world should be
Positive Statements = Descriptive Analysis
are statements that attempt to describe the world as it is
The Economist as a
Scientist
Production Possibilities Frontier
is a graph that shows the combination of output that the economy can possibly produce given the available factors of production and the available production technology
Circular-Flow Diagram
is a visual model of economy that shows how money flows through markets among household and firms
Interdependence and the gain from trade
Absolute advantage
is the comparison among producers of goods according to their productivity or the ability to produce a good using fewer inputs than another producer
Comparative advantage
is the ability to produce a good at a lower opportunity cost than another producer
Patterns of production and trade are based upon differences in opportunity cost
Gains from specialization and trade are based on comparative advantage not absolute advantage
Interdependence occurs because people are better off when they specialize and trade with others