Learning Unit 1: Introduction (How people interact (Principle 5 : Trade…
Learning Unit 1: Introduction
10 Principles of Economics
How people make decisions
Principle 2 : The cost of something is what you give up to get it.
decisions require comparing costs and benefits of alternatives.
opportunity cost of an item is what you give up to obtain that item.
Principle 3 : Rational people think at the margin.
" people make decisions by comparing costs and benefits at the margin."
Principle 1 : People Face Trade Offs
" to get one thing, we usually have to give up another thing."
Efficiency : society gets the most that it can from its scarce resources
Equity : benefits of those resources are distributed fairly among the members of society
Principle 4 : People respond to incentives
Marginal changes in costs or benefits motivate people to respond.
How people interact
Principle 5 : Trade can make everyone better off
competition results in gains from trading.
trade allows people to specialize in what they do best.
people gain from their ability to trade with one another.
Principle 6 : Markets are usually a good way to organize economic activity.
Market economy is an economy that alloacates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Adam Smith says '' Households and firms interacting in markets act as if guided by an INVISIBLE HAND. "
Principle 7 : Governments can sometimes improve market outcomes.
Markets work only if property rights are enforced.
Market failure occurs when the market fails to allocate resources efficiently.
When the market fails, government can intervene to promote efficiently and equity.
How the economy as a whole works
Principle 8 : A country's standard of living depends on its ability to produce goods and services.
Productivity is the amount of goods and services produced from each hour of a worker's time.
May be measured in different ways - comparing personal incomes , comparing the total market value of an nation's production.
Principle 9 : Prices rise when the government prints too much money.
Inflation is an increase in the overall level of prices in the economy.
Cause of the inflation - growth in the quantity of money.
When government creates large quantities of money, the value of the money falls.
Principle 10 : Society faces a short-run trade off between inflation and unemployment.
Inflation or Unemployment - a short run trade off!
The trade off plays a key role in the analysis of the business cycle - fluctuations in economic activity such as employment and production.
Thinking like an Economist.
evaluate the cost of individual and social choices.
examine and understand how certain events and issues are related.
think in terms of alternatives
Economist as a Scientist.
involves thinking analytically and objectively.
develops theories, collects and analyzes data to evaluate the theories
makes use of the scientific method.
The Production Possibilities Frontier
The Circular Flow Diagram
Economists in Malaysian Government.
Number of hours required to produce a unit of output.
The opportunity cost of sacrificing one good for another.
The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.
Comparison among producers of a good according to their productivity.