CHAPTER+1+.+10+PRINCIPLES+OF+ECONOMICS+;)

=Ten Principles of Economics =  __//**What is Economics?**//__
 * Economics: Study of how society manages scare resources.
 * Scarcity: Lack of resources.

= **//HOW PEOPLE MAKE DECISIONS//** =

__**//Principle 1: People Face Trade-offs//**__ One needs to give up one thing in order to obtain something else.

//"Guns and Butter"// = Trade-off between National defense VS. Standard of living 
 * Efficiency: When the society is maximizing its benefits from the scarce resources.
 * Equity: When benefits are distributed fairly to all people in the society.

__**//Principle 2: The Cost of Something Is What You Give Up to Get It//**__ Because many people face trade-offs, they need to compare the costs and benefits of their actions.


 * Opportunity cost: What you lose to obtain a certain item.

**__//Principle 3: Rational People Think at the Margin//__** Rational people always take actions that bring them most benefits.

 Rational decision maker takes action only when Marginal benefit > Marginal cost.
 * Rational people: People who do things that can achieve their goals.
 * Marginal changes: Adjustments or addition to an original plan of action.
 * Marginal cost: Additional costs.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Marginal benefit: Willingness of an individual to pay- Actual amount paid.

<span style="font-family: 'Lucida Console',Monaco,monospace;">__//**Principle 4: People Respond to Incentives**//__ Incentives change the behaviors and decisions of people. If the policymakers do not know how their policies will affect the incentives, they will not get the results they planned to get.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Incentive: Something that promotes people to act.

= HOW PEOPLE INTERACT =

<span style="font-family: 'Lucida Console',Monaco,monospace;">__//**Principle 5: Trade Can Make Everyone Better Off**//__ Everyone could be better off as they trade, because each of them may specialize in certain goods, and trade those goods for some things that they cannot obtain easily. If people give out what they are specialized in and receive what they lack, everyone will eventually be better off from trade.

<span style="font-family: 'Lucida Console',Monaco,monospace;">**//__Principle 6: Markets Are Usually a Good Way to Organize Economic Activity__//** <span style="font-family: 'Lucida Console',Monaco,monospace;"> In a market economy, firms and households interact in the marketplace, and their decisions depend on the price and self-interest.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Market Economy: An economy that allocates resources through decisions of households and firms as they interact.

Adam Smith- Households and markets interact as if they are guided by an "Invisible Hand." (Invisible hand: guides them to a desirable market outcome)

In a market: - Buyers look at the price to determine how much to demand - Sellers look at the price to decide how much to supply

<span style="font-family: 'Lucida Console',Monaco,monospace;">__//**Principle 7: Governments Can Sometimes Improve market Outcomes**//__ Why do we need the government? - Because the invisible hand works only if the rules are enforced by the government. (Property rights, especially.) - To promote efficiency & equity.

When one cannot allocate the resources efficiently, a market failure takes place. Causes of market failure could be: <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Externality: Effect of one's action on a bystander.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Market Power: Ability of an individual (or a small group) to influence the market prices.

= HOW THE ECONOMY AS A WHOLE WORKS =

<span style="font-family: 'Lucida Console',Monaco,monospace;">__//**Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services**//__ More productivity= Higher standard of living! (Productivity is the determinant of a living standard) <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Productivity: Quantity of goods/services produced in an hour.

<span style="font-family: 'Lucida Console',Monaco,monospace;">__//**Principle 9: Prices Rise When the Government Prints Too Much Money**//__ When there is too much money supply, an inflation will take place. (More money--> Value of money falls--> Higher price levels) <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Inflation: Rise in the price level in an economy/ Devaluation of money.

<span style="font-family: 'Lucida Console',Monaco,monospace;">__//**Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment**//__ Long-run effect of increase in money supply: - Increase in price levels

Short-run effects of increase in money supply: - Increase in demand for goods - Rise in price levels - Lower unemployment rates

<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Business cycle: Variations in economic activities. (Ex- employment, production, etc)

= //GLOSSARY// = <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * Scarcity: Limited nature of resources


 * Economics: Study of how a society manages its scarce resources


 * Efficiency: Property of society getting the most it can from limited resources


 * Equity: Property of distributing economic prosperity


 * Opportunity cost: What must be given up to obtain something else


 * Incentive: Something that motivates people


 * Externality: Impact of one's action on a bystander


 * Productivity: Quantity of goods and services produced from each hour of a worker's time


 * Inflation: devaluation of money.