Chapter 1: Ten principles of economics
Definitions
Scarcity: the limited nature of society's resources
Economics: the study of how society manages its scarce resources
Principle 1: People face trade- offs (we usually have to give up something else in order to get something)
Efficiency: the property of society getting the most it can from its scare resources
Equity: the property of distributing economic prosperity fairly among the members of society
Principle 2: The cost of something is what you give up to get it
opportunity cost: the best alternative that must be given up to obtain some item
Principle 3: rational people think at the margin (decisions are made comparing costs and benefits at the margin). Optimal decision is when Marginal Benefit = Marginal Cost (MB = MC)
Principle 4: People respond to incentives (marginal changes to costs and benefits lead to decisions to choose one alternative over another)
Principle 5: Trade can make everyone better off (trade allows people to specialize in what they do best)
Principle 6: Markets are usually a good way to organize economic activity
households and firms interact in markets as if guided by an invisible hand
invisible hand: the idea that buyers and sellers freely interacting in a market economy will create an outcome that allocates goods and services to those people who value them most highly and makes the best use of our scare resources
Principle 7: governments can sometimes improve market outcomes (to prevent market failure)
Property rights: the ability of an individual to own and exercise control over scare resources
Externality: impact of one person's actions on economic wellbeing (i.e: CO2 emission)
Market power: the ability of a single economic actor to have a substantial influence on market prices
Principle 8: The standard of living depends on a country's production
Price rise when the government prints too much money
large quantity of money => the value of money falls
Inflation: an increase in the overall level of prices in the economy
Principle 10: Society faces a short- term trade- off between inflation and unemployment (reducing price means reducing the demanded for workers)