Principle 1: People Face Trade-Offs
Making decisions requires trading off one goal against another.
Example: Consider a student who much decide how to allocate her most valuable recourse-her time. She can spend all of her time studying economics; she can spend all of her time studying psychology; or she can divide her time between the two.
Example: Guns and Butter
efficiency
the property of society getting the most it can from its scarce 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
Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative course of action.
Example: What is the cost of college? The costs is what you give up, such as a giving up a job and work experience.
Opportunity Cost
whatever must be given up to obtain some item
Principle 3: Rational People Think at the Margin
Rational people know that decision in life are rarely black and white but usually involve shades of gray.
Ex: At dinner time it is not a choice between fasting and eating like a pig, but maybe between one and two scoops of mash potatoes.
A plane selling a seat at a stand by price.
Marginal changes
small incremental adjustments to a plan of action
Principle 4: People Respond to Incentives
Because rational people make decision by comparing costs and benefits, they respond to incentives.
ex: When the price of apples rises, people eat pears.
Tax on gasoline will make people want to drive electric cars or drives less.
Seat belts make people want to drive fast and more recklessly, more accidents but less that result in death.
Principle 5: Trade Can make Everyone Better Off
Trade between two countries can make each country better off.
Ex: Family member of looks for a job, he or she competes against member of other families who are looking for jobs too.
Countries as well as families benefit from the ability to trade with one another.
Principle 6: Markets are usually a good way to organize economic Activity
Invisible hand guides economic activity.
Market Economy: An economy that allocates recourse through the decentralized decisions of many firms and households as they interact in markets for good and services.
Principle 7: Government Can Sometimes Improve Market Outcomes
One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy.
Property Rights
The ability of an individual to own and exercise control over scarce resources.
Market Failure
A situation in which a market left on its own fails to allocate resources efficiently.
Externality
The impact of one person’s actions on the wellbeing of a bystander
Market Power
The ability of a single economic actor or small group of actors to have a substantial influence on market prices
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-that is, the amount of goods and services produced from each hour of a worker’s time.
Principle 9: Price Rise When the Government Prints Too Much Money
Inflation: an increase in the overall level of prices in the economy
ex: Germany in January 1921, newspaper cost 0.30 marks then two years later it costs 70,000,000 marks.
Principle 10: Society Faces a Short-Run Trade-Off between inflation and unemployment
Although a higher level of prices is, in the long run, the primary effect of increasing the quanitiy of money the short-run effects of monettary injections as follows:
-Increasing the amount of money in the economy stimulates the overall level of spending and this the demand for goods and services
-High demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to increase the quality of goods and services they produce and to hire more workers to producer those good and services.
-More hiring means lower unemployment.
Business Cycle:
fluctuations in economic activity, such as employment and production.
