Chapter 1
Scarcity:
the limited nature of society’s resources
Economics:
study of how society manages its scarce resources
People:
how people decide what to buy, how much to work, save & spend
Firms:
how firms decide how much to produce & how many workers to hire
Society:
how society decides how to divide its resources
There are ten key principles of economics centred around:
- how people make decisions
- how people interact
- how the economy works as a whole
The principles of how people make decisions
1) Trade-offs
- all decisions involve tradeoffs,
e.x. having more money to buy things requires working longer hours, which leaves less time for
leisure
Society faces an important tradeoff:
efficiency vs equality
Efficiency:
when society gets the most from its scarce resources
Equality:
when prosperity is distributed uniformly among society’s members
2) Opportunity cost
- opportunity cost of any item is whatever must be given up to obtain it
- making decisions requires comparing the costs & benefits of alternative choices
3) Rational people think at the margin
- systematically & purposefully do the best they can to achieve their objectives
- make decisions by evaluating costs & benefits of marginal changes
4) People respond to incentives
Incentive:
something that induces a person to act, such as rewards & forfeits
, The principles of how people interact
5) Trade can make everyone better
Rather than being self-sufficient, people can specialize in producing one good or service &
exchange it for other goods, countries also benefit from trade and specialization.
6) Markets are usually a good way to organize economic activity
Market:
a group of buyers & sellers
“Organize economic activity means”
- what goods to produce
- how to produce them
- how much of each to produce
- who gets them
Market economy:
allocates resources through decentralized decisions of many households & firms as they interact
households & firms are led by an “invisible hand” to promote general economic well-being
Invisible hand:
- interaction of buyers & sellers that determines the prices
- each price reflects the good’s value to buyers & cost of producing the good
7) Governments can sometimes improve market outcomes
- invisible hand will only work if governments enforce property rights
- property rights:
ability of an individual to exercise control over scarce resources
A government can interfere with the economy to promote efficiency and equity.
- market failure:
where the market fails to allocate society’s resources efficiently
Causes of market failure:
externalities:
when the production or consumption of a good affects bystanders
market power:
a single buyer or seller has a substantial influence on market price
Public policy may promote efficiency
A Government may also alter market outcome to promote equity.
Scarcity:
the limited nature of society’s resources
Economics:
study of how society manages its scarce resources
People:
how people decide what to buy, how much to work, save & spend
Firms:
how firms decide how much to produce & how many workers to hire
Society:
how society decides how to divide its resources
There are ten key principles of economics centred around:
- how people make decisions
- how people interact
- how the economy works as a whole
The principles of how people make decisions
1) Trade-offs
- all decisions involve tradeoffs,
e.x. having more money to buy things requires working longer hours, which leaves less time for
leisure
Society faces an important tradeoff:
efficiency vs equality
Efficiency:
when society gets the most from its scarce resources
Equality:
when prosperity is distributed uniformly among society’s members
2) Opportunity cost
- opportunity cost of any item is whatever must be given up to obtain it
- making decisions requires comparing the costs & benefits of alternative choices
3) Rational people think at the margin
- systematically & purposefully do the best they can to achieve their objectives
- make decisions by evaluating costs & benefits of marginal changes
4) People respond to incentives
Incentive:
something that induces a person to act, such as rewards & forfeits
, The principles of how people interact
5) Trade can make everyone better
Rather than being self-sufficient, people can specialize in producing one good or service &
exchange it for other goods, countries also benefit from trade and specialization.
6) Markets are usually a good way to organize economic activity
Market:
a group of buyers & sellers
“Organize economic activity means”
- what goods to produce
- how to produce them
- how much of each to produce
- who gets them
Market economy:
allocates resources through decentralized decisions of many households & firms as they interact
households & firms are led by an “invisible hand” to promote general economic well-being
Invisible hand:
- interaction of buyers & sellers that determines the prices
- each price reflects the good’s value to buyers & cost of producing the good
7) Governments can sometimes improve market outcomes
- invisible hand will only work if governments enforce property rights
- property rights:
ability of an individual to exercise control over scarce resources
A government can interfere with the economy to promote efficiency and equity.
- market failure:
where the market fails to allocate society’s resources efficiently
Causes of market failure:
externalities:
when the production or consumption of a good affects bystanders
market power:
a single buyer or seller has a substantial influence on market price
Public policy may promote efficiency
A Government may also alter market outcome to promote equity.
