1 - Ten Principles of Economics#
The word ‘economy’ is derived from the Greek oikonomos, which means “one who manages a household.”
Scarcity means that society has limited resources.
Economics is the study of how society manages its scarce resources.
1.1 - How People Make Decisions#
The first four principles concern individual decision making.
Principle 1: People Face Trade-Offs#
Efficiency means that society is geting the greatest benefits from its scarce resources.
Equality means that benefits are distributed uniformly among society’s members.
Principle 2: The Cost of Something is What You Give Up to Get It#
The opportunity cost of an item is what you give up to get it.
Principle 3: Rational People Think at the Margin#
Rational people systematically and purposefully do the best they can to achieve their goals, given the available opportunities.
Marginal change describes the incremental adjustment to an existing plan of action. Decision making involves marginal benefits and marginal costs.
Principle 4: People Respong to Incentives#
An incentive is something that induces a person to act, such as a punishment or reward.
1.2 - How People Interact#
The next 3 principles concern how people interact with one another.
Principle 5: Trade Can Make Everyone Better Off#
Trade improves individual economies because it can allow each economy to specialize.
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity#
A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Principle 7: Governments Can Sometimes Improve Market Outcomes#
Property rights is the ability of an individual to own and exercise control over scarce resource.
Market failure describes a situation in which a market left on its own does not allocate resources efficiently. A market failure may be caused by an externality, which is the impact of one person’s actions on the well-being of a bystander. It may also be caused by market power, which is the ability of a single economic actor (or group of actors) to have a substantial influence on market prices.
1.3 - How the Economy as a Whole Works#
The last 3 principles concern the workings of the economy as a whole.
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services#
Productivity measures the quantity of goods and services produced from each unit of labor input. Standard of living in different countries is generally closely correlated with productivity.
Principle 9: Prices Rise When the Government Prints Too Much Money#
Inflation is an increase in the overall level of prices in the economy.
Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment#
The short-term effects of an increase in the money supply are generally as follows:
Increasing the money supply stimulates the overall level of spending and thus the demand for goods and services.
Over time, higher demand causes firms to raise prices but encourages them to hire more workers to produce a larger quantity of goods and services in the short term.
More hiring leads to lower unemployment.