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Ten Principles of Economics (Ten (10) principles (1 - 4 How people make…
Ten Principles of Economics
Ten (10) principles
5 - 7
How people interact
5
Trade can make everyone better off
Trade allows specialization in what you're good at, and buy a greater variety of goods and services
6
Markets are usually a good way to organize economic activity
Market economy
: allocates resources through decentralized decisions of many firms/households. These firms/households interact in the markets for goods and services.
Prices are the instrument with which the invisible hand directs economic activity
7
Governments can sometimes improve market outcomes
Property rights
: the ability of an individual to own and exercise control over scarce resources
Market failure
: when a market left on its own fails to allocate resources efficiently
Externality
: the uncompensated impact of one person's actions on the well-being of a bystander (e.g. pollution)
Market power
: ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
8 - 10
How economy works as a whole
8
A country's standard of living depends on its ability to produce goods and services
Productivity
: the quantity of goods and services produced from each hour of a worker's time
The more productive a country, the higher its living standards
9
Prices rise in the long run when the government prints too much money
Inflation
: increase in the overall prices in the economy
10
Society faces a short run trade off between inflation and unemployment
1 - 3
Short run effects on monetary injection:
1
stimulates overall level of spending, thus increases demand for goods and services
2
Higher demand means:
Long run, firms raise their prices
2
Short run, firms produce more goods and services, hire more workers
3
More hiring means lower unemployment
Business cycle
: irregular/unpredictable fluctuations in economic activity, such as employment, production
1 - 4
How people make decisions
1
People face tradeoffs
Efficiency
: society getting the most it can from scarce resources
Equity
: distributing economic prosperity fairly among members of society
2
The cost of something is what you give up to get it
Opportunity cost
: what must be given up to obtain something else
3
Rational people think at the margins
Rational people
: systematically and purposefully do the best they can to achieve their objectives
Marginal changes
: small incremental adjustments to a plan of action (e.g. people choose whether to take an extra bite, not choosing between fasting vs eating like pig)
4
People respond to incentives
Incentive
: induces someone to do something (note: policies may cause unintended results, such as seat belt laws causing more accidents as people drive faster)