Chapter 1: Ten Principles of Economics
Terms in this set (32)
Origin of Economy
-comes from the Greek word oikonomos which means "one who manages a household"
-the limited nature of society's resources
-Because society has limited resources we cannot produce all the goods and services people wish to have
-the study of how society manages its scarce resources
-an economy is just a group of people dealing with one another as they go about their lives
Principle #1: People Face Trade-Offs
-"There ain't no such thing as a free lunch"
-To get one thing that we like, we usually have to give up another thing that we like
-Making decisions requires trading off one goal against another
-Recognizing that people face trade-offs does not by itself tells us what decisions they will or should make.
-the property of society getting the maximum benefits from its scarce resources
-the property of distributing economic prosperity uniformly among the members of society
Efficiency v. Equality
-Efficiency refers to the size of the economic pie and equality refers to how the pie is divided into individual slices.
Principle #2: The Cost of Something is What You Give Up to Get It
-Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action.
-whatever must be given up to obtain some item
EXAMPLE: A college athlete can earn millions if they drop out of school and play sports professionally. The opportunity cost of dropping out of school is not receiving a college education.
Principle #3: Rational People Think at the Margin
-economists normally assume that people are rational
-rational people often make decisions by comparing marginal benefits and marginal costs
-a rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost
-people who systematically and purposefully do the best they can to achieve their objectives
-a small incremental adjustment to a plan of action
Principle #4: People Respond to Incentives
-Because rational people make decisions by comparing costs and benefits, they respond to incentives
-Public policy makers should never forget about incentives: Many policies change the costs or benefits that people face and, therefore, alter their behavior.
-The influence of price on the behavior of consumers and producers is crucial for how a market economy allocates scarce resources.
EXAMPLE: A higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more.
-something that induces a person to act
-can be an punishment or reward
Principle #5: Trade Can Make Everyone Better Off
-Trade between two countries can make each country better off
-By trading with others, people can buy a greater variety of goods and services at lower cost.
-Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.
Principle #6: Markets are Usually a Good Way to Organize Economic Activity
-the decisions of a central planner are replaced by the decisions of million of firms and households
-firms decide whom to hire and what to make
-households decide which firms to work for and what to buy with their incomes
-households and firms interact in markets as if they were guided by an "invisible hand" that leads them to desirable market outcomes
-prices are the instrument with which the invisible hand directs economic activity
-an economy that allocates through the decentralized decisions of many firms and households as they interact in markets for goods and services
Principle #7: Governments Sometimes Improve Market Outcomes
-the invisible hand can only work its magic if the government enforces the rules and maintains the institutions that are key to a market economy
-markets need institutions to enforce property rights
-w all rely on the government-provided police and courts to enforce our rights over the things we produce-and the invisible hand counts on our ability to enforce our rights
-There are two reasons for a government to intervene in the economy and change the allocation of resources that people would choose on their own: (1) to promote efficiency or (2) promote equality.
-To say that the government can improve on market outcomes at times does not mean that it always will.
-the ability of an individual to own an exercise control over scarce resources
-a situation in which a market left on its own fails to allocate resources efficiently
-the impact of one person's actions on the well-being of a bystander
-a possible cause of market failure
-the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
-a possible cause of market failure
Principle #8: A Country's Standard of Living Depends on its Ability to Produce Goods and Services
-almost all variation in living standards is attributable to differences in countries productivity
EXAMPLE: It might be tempting to credit labor unions and minimum-wage laws for the rise in living standards of American workers over the past century. Yet the real hero of American workers is their rising productivity.
-the quantity of goods and services produced from each unit of labor input
Principle #9: Prices Rise When the Government Prints Too Much Money
-Inflation is caused by a growth in the quantity of money
-Because high inflation imposes carious costs on society, keeping inflation at a low level is a goal of economic policymakers around the world.
-an increase in the overall level of prices in the economy
Principle #10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
-fluctuations in economic activity, such as employment and production
List the 10 Principles of Economics
How People Make Decisions
1. People Face Trade-Offs
2. The Cost of Something is What You Give Up to Get It
3. Rational People Think at the Margin
4. People Respond to Incentives
How People Interact
5. Trade Can Make Everyone Better Off
6. Markets Are Usually a Good Way to Organize Economic Activity
7. Governments Can Sometimes Improve Market Outcomes
How the Economy as a Whole Works
8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints Too Much Money
10. Society Faces a Short-Run Trade-Off Between Inflation and Unemployment
Water is necessary for life. Is the marginal benefit of a glass of water large or small?
-It depends on the consumer. Water is available and ready for me when I want, so the marginal benefit of a glass of water is small. However, someone who has less access to water compared to me has a high marginal benefit for a glass of water.
-As long as the marginal benefit outweighs the marginal cost then a rational person will take action.
Why should policymakers think about incentives?
-Rational people respond to incentives. Many policies change the costs or benefits that people face and, therefore, alter their behavior. When policy makers fail to consider how their policies affect incentives, they often end up eith unintended consequences.
Why is productivity important?
Higher productivity means a higher standard of living.