Chapter+1+10+Principles+of+Economics

==Chapter 1: 10 Principles of Economics  ==

 Glossary
__Quick Overview of **Economics** __ Simply put, economics deals with **scarcity** within the society. While the decisions are made through the interactions between households (consumers) and firms (producers), economists focus on how they make decisions, interact with one another, and analyze trends that affect the economy. Below are the 10 Principles of Economics that unify the main ideas of economics.

Principle 1: People face trade-offs First of all, what is //trade-offs//? It's an action of giving up something to get another thing. One example of trade-offs is spending your allowance in clothes, CDs, instead of saving it for the future. You give up accumulating the allowance for something more expensive and valuable to get clothes and CDs. As you can see, people face trade-offs every day. //Why// do people face trade-offs?  They face trade-offs because there is limited resources that they have to make decisions by giving up one thing to get the other one. Let's say that the government decides to focus on equity than efficiency by creating welfare system for the needy people. Although this achieves equity by distributing the wealth to many people, it fails in efficiency because the government uses the income from rich to support the poor. This discourages rich to produce goods and services, which ultimately reduces the efficiency.
 * Efficiency** vs. **Equity**: When talking about trade-offs, efficiency and equity play an important role. Efficiency is like a size of the pizza (small/medium/large) and equity is how the pizza is divided (perhaps into 4/6/8 pieces). It is sometimes difficult to achieve both efficiency and equity. For example...

Principle 2: The Cost of something is what you Give Up to Get it Principle 2 is very similar to Principle 1. As mentioned above, people have to make decisions when they face trade-offs. The decisions are made based on the **opportunity cost**. For example, opportunity cost of studying for the exam is a good sleep. You choose to study late at night but you miss the chance of a good night's sleep.  Principle 3: Rational People think at the Margin
 * Rational people** base their decisions if the marginal benefit (benefit you get from one unit increase of something) is greater than the marginal cost (cost you pay for one unit increase of something) of that choice. Let's say that you are considering wheter to eat an extra hamburger. The marginal benefit of eating one extra is the satisfaction and not being hungry. The marginal cost is just the cost of the hamburger. Since the marginal benefit is greater than the marginal cost, as a rational decision maker, you decide to eat one more.

 Principle 4: People respond to Incentives People respond to **incentives**. Therefore, it is important to acknowledge them because incentives can alter people's behaviors. Change in prices can be a great example of incentive that can alter people's actions. For example, if the price of the apples rises, people will have an incentive to reduce the quantity of apples they buy. Due to this, policymakers have to keep in mind of the role of incentive and how it can alter people's behaviors.

Principle 5: Trade can make Everyone Better Off Although other countries may seem as competitors in a market, they are actually partners when it comes to trade. It's because trade makes everyone better off as it allows each country to specialize in what the country is good at. If the country wasn't open to trade, it would had to produce all the goods by itself whereas if it was open to trade, it could just focus on what it is best at. See the example below.  Principle 6: Markets are usually Good Way to organize Economic Activity Adam Smith was the supporter for **market economy.** He believed that interaction between the firms and households will eventually lead them to desirable market outcome, guided by the "invisible hand." Smith opposed the government intervention because the self-interest of the economic participants automatically leads the outcome to market equilibrium. Economist Adam Smith's famous book, //An Inquiry into the Nature and Causes of the Wealth of Nations//

 Principle 7: Governments can sometimes improve Market Outcomes Although Adam Smith opposed government intervention, occasional help from government is needed to improve the market outcomes because markets only work when the **property rights** are enforced. Without property rights, people do not have an incentive to sell their products. For example, why would farmers grow food if they know that it'll be stolen? It's police and court, provided by government, that ensure people to do what they should do. //When// does the government intervene? When there is a **market failure**. There are two market failures that we're going to explore: **externality** and **market power.** These are the scenarios where government can enhance economic efficiency more than the invisible hands.

<span style="color: #f87e2a; font-family: Impact,Charcoal,sans-serif; font-size: 130%;">Principle 8: A Country's Standard of Living depends on its Ability to produce Goods and Services A country's standard of living depends on its **productivity.** Nations with higher productivity, meaning larger quantity of goods and services per unit of time, are able to enjoy high standard of living because they have a wider range of goods and services to choose from.

<span style="color: #f87e2a; font-family: Impact,Charcoal,sans-serif; font-size: 130%;"> Principle 9: Prices Rise when the Government prints Too Much Money <span style="color: #f87e2a; font-family: Impact,Charcoal,sans-serif; font-size: 130%;"> Principle 10: Society faces a Short-Run Trade-Off between Inflation & Unemployment Inflation is closely related to unemployment in a short-run. //How?// See the diagram below:
 * Inflation** happens when the government prints out too much money, which decreases the value of the money. When the value of the money declines, the price rises and this increases the quantity of money. If the price doubled, the quantity of money would also double.

<span style="color: #6bff00; font-family: Impact,Charcoal,sans-serif; font-size: 130%;">Quiz ! 1. Why do we make choices and consider factors such as opportunity cost? 2. When does the government help the economic outcome? 3. How does inflation occur? 4. How do rational people think? 5. What is specialization? <span style="color: #6bff00; font-family: Impact,Charcoal,sans-serif; font-size: 130%;"> <span style="color: #6bff00; font-family: Impact,Charcoal,sans-serif; font-size: 120%;">Answers

by Sally B.