he word economy comes from the Greek word oikonomos, which
T means "one who manages a household." At first, this origin
might seem peculiar. But in fact, households and economies
have much in common.
A household faces many decisions. It must decide which house-
hold members do which tasks and what each member receives in
return: Who cooks dinner? Who does the laundry? Who gets the extra
dessert at dinner? Who gets to drive the car? In short, a household
must allocate its scarce resources (time, dessert, car mileage) among Ten Principles
its various members, taking into account each member's abilities,
efforts, and desires.
Like a household, a society faces many decisions. It must find
of Economics
some way to decide what jobs will be done and who will do them. It
needs some people to grow food, other people to make clothing, and
still others,fo design computer software. Once society has allocated
people (as well as land, buildings, and machines) to various jobs,
it must also allocate the goods and services they produce. It must
decide who will eat caviar and who will eat potatoes. It must decide
who will drive a Ferrari and who will take the bus.
, 2 PART I INTRODUCTION
The management of society's resources is important because resources are scarce.
scarcity Scarcity means that society has limited resources and therefore cannot produce all
the limited nature of the goods and services people wish to have. Just as each member of a household
society's resources cannot get everything she wants, each individual in a society cannot attain the
highest standard of living to which she might aspire.
economics Economics is the study of how society manages its scarce resources. In most
the study of how society societies, resources are allocated not by an all-powerful dictator but through the
manages its scarce combined choices of millions of households and firms. Economists therefore study
resources how people make decisions: how much they work, what they buy, how much they
save, and how they invest their savings. Economists also study how people interact
with one another. For instance, they examine how the many buyers and sellers of a
good together determine the price at which the good is sold and the quantity that
is sold. Finally, economists analyze the forces and trends that affect the economy
as a whole,.including the growth in average income, the fraction of the population
that cannot find work, and the rate at which prices are rising.
The study of economics has many facets, but it is unified by several central
ideas. In this chapter, we look at Ten Principles of Economics. Don't worry if you
don't understand them all at first or if you aren't completely convinced. We explore
these ideas more fully in later chapters. The ten principles are introduced here to
give you a sense of what economics is all about. Consider this chapter a "preview
of coming atfractions."
1-1 How People Make Decisions
There is no mystery to what an economy is. Whether we are talking about the
economy of Los Angeles, the United States, or the whole world, an economy is just
a group of people dealing with one another as they go about their lives. Because
the behavior of an economy reflects the behavior of the individuals who make up
the economy, our first four principles concern individual decision making.
1-la Principle 1: People Face Trade-Offs
You may have heard the old saying, "There ain't no such thing as a free lunch."
Grammar aside, there is much truth to this adage. To get something that we like, we
usually have to give up something else that we also like. Making decisions requires
trading off one goal against another.
Consider a student who must decide how to allocate her most valuable
resource-her time. She can spend all of her time studying economics, spend all
of it studying psychology, or divide it between the two fields. For every hour she
studies one subject, she gives up an hour she could have used studying the other.
And for every hour she spends studying, she gives up an hour she could have
spent napping, bike riding, playing video games, or working at her part-time job
for some extra spending money.
Consider parents deciding how to spend their family income. They can buy food,
clothing, or a family vacation. Or they can save some of their income for retirement
or their children's college education. When they choose to spend an extra dollar on
one of these goods, they have one less dollar to spend on some other good.
Wh ·n penple at grouped into socielies, they fo ~. diffen~nt kiricls f I.rad ·offs.
One classic trade-off is between "guns and butter." The more a society spends on
national defense (guns) to protect itself from foreign aggressors, the less it can
spend on consumer goods (butter) to raise its standard of living. Also important
T means "one who manages a household." At first, this origin
might seem peculiar. But in fact, households and economies
have much in common.
A household faces many decisions. It must decide which house-
hold members do which tasks and what each member receives in
return: Who cooks dinner? Who does the laundry? Who gets the extra
dessert at dinner? Who gets to drive the car? In short, a household
must allocate its scarce resources (time, dessert, car mileage) among Ten Principles
its various members, taking into account each member's abilities,
efforts, and desires.
Like a household, a society faces many decisions. It must find
of Economics
some way to decide what jobs will be done and who will do them. It
needs some people to grow food, other people to make clothing, and
still others,fo design computer software. Once society has allocated
people (as well as land, buildings, and machines) to various jobs,
it must also allocate the goods and services they produce. It must
decide who will eat caviar and who will eat potatoes. It must decide
who will drive a Ferrari and who will take the bus.
, 2 PART I INTRODUCTION
The management of society's resources is important because resources are scarce.
scarcity Scarcity means that society has limited resources and therefore cannot produce all
the limited nature of the goods and services people wish to have. Just as each member of a household
society's resources cannot get everything she wants, each individual in a society cannot attain the
highest standard of living to which she might aspire.
economics Economics is the study of how society manages its scarce resources. In most
the study of how society societies, resources are allocated not by an all-powerful dictator but through the
manages its scarce combined choices of millions of households and firms. Economists therefore study
resources how people make decisions: how much they work, what they buy, how much they
save, and how they invest their savings. Economists also study how people interact
with one another. For instance, they examine how the many buyers and sellers of a
good together determine the price at which the good is sold and the quantity that
is sold. Finally, economists analyze the forces and trends that affect the economy
as a whole,.including the growth in average income, the fraction of the population
that cannot find work, and the rate at which prices are rising.
The study of economics has many facets, but it is unified by several central
ideas. In this chapter, we look at Ten Principles of Economics. Don't worry if you
don't understand them all at first or if you aren't completely convinced. We explore
these ideas more fully in later chapters. The ten principles are introduced here to
give you a sense of what economics is all about. Consider this chapter a "preview
of coming atfractions."
1-1 How People Make Decisions
There is no mystery to what an economy is. Whether we are talking about the
economy of Los Angeles, the United States, or the whole world, an economy is just
a group of people dealing with one another as they go about their lives. Because
the behavior of an economy reflects the behavior of the individuals who make up
the economy, our first four principles concern individual decision making.
1-la Principle 1: People Face Trade-Offs
You may have heard the old saying, "There ain't no such thing as a free lunch."
Grammar aside, there is much truth to this adage. To get something that we like, we
usually have to give up something else that we also like. Making decisions requires
trading off one goal against another.
Consider a student who must decide how to allocate her most valuable
resource-her time. She can spend all of her time studying economics, spend all
of it studying psychology, or divide it between the two fields. For every hour she
studies one subject, she gives up an hour she could have used studying the other.
And for every hour she spends studying, she gives up an hour she could have
spent napping, bike riding, playing video games, or working at her part-time job
for some extra spending money.
Consider parents deciding how to spend their family income. They can buy food,
clothing, or a family vacation. Or they can save some of their income for retirement
or their children's college education. When they choose to spend an extra dollar on
one of these goods, they have one less dollar to spend on some other good.
Wh ·n penple at grouped into socielies, they fo ~. diffen~nt kiricls f I.rad ·offs.
One classic trade-off is between "guns and butter." The more a society spends on
national defense (guns) to protect itself from foreign aggressors, the less it can
spend on consumer goods (butter) to raise its standard of living. Also important
