Chapter+1+TEN+PRINCIPLES+OF+ECONOMICS

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=LEARNING OBJECTIVES:= By the end of this chapter, students should understand: o That economics is about the allocation of scarce resources. o That individuals faces trade-offs. o The meaning of opportunity cost. o How to use marginal reasoning when making decisions. o How incentives affect people’s behavior o Why trade among people or nations can be good for everyone. o Why markets are a good, but not perfect, way to allocate resources.

I. Introduction

 * 1) The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.”
 * 2) This makes some sense because in the economy we are faaced with many decisions (just as a household is).
 * 3) Fundamental economic problem: resources are scarce.
 * 4) Definition of scarcity : the limited nature of society’s resources.
 * 5) Definition of economics: the study of how society manages its scarce resources.

II. How people make decisions
A. Principle #1: People Face Trade-offs a. “There is no such thing as a free lunch.” Making decisions requires trading one goal for another. b. Examples include how students spend their time, how a family decides to spend its income, how the US government spends tax dollars, and how regulations may protect the environment at a cost to firm owners. c. A special example of a trade-off is the trade off between efficiency and equity i. What is efficiency ? the property of society getting the most benefits from its scarce resources. ii. What is equity? The property of rationing economic prosperity fairly among the members of society/ iii. For example, tax dollars paid by wealthy Americans and then distributed to those less fortunate may improve equity but lower the return to hard work and therefore reduce the level of output produced by our resources. iv. This implies that the cost of this increased equity is a reduction in the efficient use of our resources. d. Recognizing that trade-offs exist doesn’t indicate what decisions should or will be made.

B. Principle #2: The cost of something is what you give up to get it a. Making decisions requires individuals to consider the benefits and costs of some actions. b. What are the costs of going to college? i. We cannot count room and board (at least of all the cost) because the student would have to pay for food and shelter even if he was not in school. ii. We would not want to count the value of student’s time because he could be working for pay instead of attending classes and studying. c. What is opportunity cost? Whatever must be given up in order to obtain some item.

C. Principle #3: Rational People Think at the Margin a. Economists generally assume that people are rational i. What is rational?systematically and purposefull doing the best you can to achieve your objectives ii. Consumers want to purchase the bundle of goods and services that allows them the greatest level of satisfaction given their incomes ad the prices they face. iii. Firms want to produce the level of output that maximizes the profits they earn. b. Many decisions in life involve incremental decisions: Should I remain in school this semester? Should I take another course this semester? Should I study an additional hour for tomorrow’s exam? i. What is marginal changes? Small incremental adjustments to a plan of action. ii. Example: suppose that flying a 200-seat plane across the country costs the airline $100,000 which means that the average cost of each seat is $500. Suppose that the plane is minutes from departure and a passenger is willing to pay $300 for a seat. Should the airline sell the seat for $300? Of course, because in this case, the marginal cost of of an additional passenger is very small. c. Another example: why is water so cheap while diamons are expensive? Because diamonds are rare, the marginal benefit of an extra diamond high.

D. Principle #4: People Respond to incentives. a. What is an incentive: something that instigates a person’s action b. Because of rational people make decisions by weighing costs and benefits, their decisions may change in response to incentives i. When the price of good increases, consumers will buy less of it because its cost has risen. ii. When the price of a good rises, producers will allocare moe resources to the production of the good because the benefit from producing the good has risen. c. Many public policies change the costs ad benefits that people face. Sometimes policymakers fall to understand how policies after incentives and behavior. d. Ex) Seat belt laws increase the use of seat belts and lower the incentives of individuals to drive safely. This leads to an increase in the number of car accidents. This also leads to an increased risk for pedestrians. media type="youtube" key="AfIJqbdRyBs" height="344" width="425" http://kr.youtube.com/watch?v=AfIJqbdRyBs

III. How People Interact
A. Principle #5: Trade can make everyone better off. a. Trade is not like a sports competition, where one side gains and the other side loses b. Consider trade that takes place inside your home. Your family is likely to be involved in trade with other families on a daily basis. Most families do not build their own homes, make their own clothes, or grow their own food. c. Countries benefit from trading with one another as well. d. Trade allows for specialization in products that countries (or families) can do best. media type="youtube" key="NDC34xe_Xu4" height="344" width="425" http://kr.youtube.com/watch?v=NDC34xe_Xu4

Related Stories...
====EU relations with China were established in 1975. Today, the EU is China’s second largest trade partner, with China being the EU’s largest partner. The main objectives of EU policy towards China are to working together on global challenges such as climate change,encourage the ongoing integration of China into the world economy and trading system, and raise the EU’s profile in China, to aid mutual understanding. China has been moving away from the status of a traditional recipient of overseas development assistance towards that of a strategic partner with whom the European Union engages on a wide range of policy issues. China is also becoming an increasingly important source of aid to other developing countries. Through trade, China and EU are getting what they lack.====

Of course, it would not be nice to trade CRAPPY stuff with each other like You-Know-Who.

 * ==Trade Makes Everyone Happy!==

=Principle 6: Markets Are Usually a Good Way to Organize Economic Activity=

**market economy**: An economic system in which economic decisions of pricing goods and services are guided by many firms and households as they interact in markets.
====Most countries today adopted a market economy instead of central planning where only the government could organize economic activity in a way that promoted economic well-being for the country as a whole. In __An Inquiry into the Nature and Causes of the Wealth of Nations__ by Adam Smith, it talks about how "invisible hand" guides the economic activities. In any market, buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply. As a result of the decisions that buyers and sellers make, market prices reflect both the value of a good to society and the cost to society of making the good. The government regulation in economy prevents the invisible hand's ability to coordinate the participants that make up the economy. For example, taxes distort prices and the decisions of households and firms.====

=Principle 7: Governments Can Sometimes Improve Market Outcomes=

**market power**: the ability of a single or few economic participant to alter the market price. ex) monopoly
====Government regulations on economy is necessary when it properly enforces the rules and maintains the institutions that are key to a market economy. A government intervenes when market failure occurs due to externality, market power, and etc. In addition, the invisible hand may fail to ensure that economic prosperity will be distributed among the participants equally. The government can improve on market outcomes by allocation of resources to promote efficiency and to promote equity.====

=Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services=

**productivity:** productivity is a ratio to measure how well an organization (or individual, industry, country) converts input resources (labor, materials, machines etc.) into goods and services.
====The growth rate of a nation's productivity determines the growth rate of its average income. In addition, most people enjoy a high standard of living. in nations where workers can produce a large quantity of goods and services per unit of time. However, people don't where workers are less productive. The relationship between productivity and living standards are closely related and has profound implications for public policy. For example, when a policymaker wants to improve the standard of living, he would raise productivity by using certain ways.==== http://www.progressdaily.com/wp-content/uploads/2006/09/gdp.gif

A country cannot stand when the productivity is relatively low.
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=Principle 9: Prices Rise When the Government Prints Too Much Money=

ex) In early 1920s after WW1, Germany was in inflation, the quantity of money tripled as the prices tripled.
=Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment=

__★inflation↑(Short Term): Spending↑ Demand↑ → Quantity Supplied↑ Workers↑ → Unemployment↓__
====In this curve, an unemployment rate of 7% seems to correspond to an inflation rate of 4% while an unemployment rate of 2% seems to correspond to an inflation rate of 6%. As unemployment falls, inflation increases.==== ====However, the equation only holds in the short term. In the LONG RUN, unemployment always returns to the natural rate of unemployment, making cyclical unemployment zero and inflation equal to expected inflation.==== ====The short-run trade-off has a great impact on the business cycle as well. So the policymakers carefully change the amount that the government spends, the amount it taxes, and the amount of money it prints.====

Questions
====1. Policymaker Michael Scofield is trying to decide whether to reduce the rate of inflation. To make an intelligent decision, what would he need to know about inflation, unemployment, and the trade-off between them?==== 2. What is the opportunity cost of reading a book?