scarcitythe limited nature of society’s resources
economicsthe study of how society manages its scarce resources
PRINCIPLE 1: PEOPLE FACE TRADE-OFFS
In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller.
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 that item.
PRINCIPLE 3: RATIONAL PEOPLE THINK AT THE MARGIN
Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action.
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.
PRINCIPLE 4: PEOPLE RESPOND TO INCENTIVES
PRINCIPLE 5: TRADE CAN MAKE EVERYONE BETTER OFF
PRINCIPLE 6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY
Smith’s great insight was that prices adjust to guide these individual buyers and sellers to reach outcomes that, in many cases, maximize the well-being of society as a whole.
PRINCIPLE 7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources.
most policies aim either to enlarge the economic pie or to change how the pie is divided.
Economists use the term market failure to refer to a situation in which the market on its own fails to produce an efficient allocation of resources.
In the presence of externalities or market power, well-designed public policy can enhance economic efficiency.
an externality, which is the impact of one person’s actions on the well-being of a bystander.
The classic example of an externality is pollution.
Another possible cause of market failure is market power, which refers to the ability of a single person (or small group) to unduly influence market prices.
PRINCIPLE 8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES
In nations where workers can produce a large quantity of goods and services per unit of time, most people enjoy a high standard of living;
Similarly, the growth rate of a nation’s productivity determines the growth rate of its average income.
productivitythe quantity of goods and services produced from each unit of labor input
PRINCIPLE 9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY
inflationan increase in the overall level of prices in the economy
PRINCIPLE 10: SOCIETY FACES A SHORT-RUN TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT
By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the overall demand for goods and services. Changes in demand in turn influence the combination of inflation and unemployment that the economy experiences in the short-run.
TABLE 1 Ten 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
circular-flow diagrama visual model of the economy that shows how dollars flow through markets among households and firms
