Chapter+1+Hanna+K





 = = =**HOW CAN YOU DEFINE ECONOMY IN ONE WORD?** = 

 = =  Economics is definitely a challenging subject that may baffle many students with its complex graphs and abstract theories. However, in order to understand the “complex” part of economics, we must start with the basics: the ten principles of economics. Ten principles of economics in this chapter will introduce you the common themes of economics that will repetitively appear throughout the textbook.

P.S: Do NOT be frustrated if principles are not fully explained. As we go through different chapters, each of the principles will be further explained. Remember, this chapter is your INTRODUCTION to these principles. 

 According to dictionary.com, economics is “the science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.” At this point, you might be thinking ‘what the heck?what does that mean?‘ Well, in plain English, economics is a study of how the society distributes and manages its “scarce” resources. A study of economics starts with the concept of scarcity. Since we have limited amount of resources, not everyone in the society can get what they want. Thankfully, by the study of economics, we are able to distributes these resources in the most “efficient” manner or “equitable manner” (we will learn about this concept a little later). If we had an unlimited amount of resources, we wouldn’t have the privilege to study economics for there will be no purpose of it.

//**FYI TIP:** If you have to remember ONE CONCEPT, REMEMBER SCARCITY //

__Principles that deal with HOW PEOPLE MAKE DECISIONS:__

 * PRINCIPLE 1: PEOPLE FACE TRADE-O****FFS**

To gain one thing, we must give up another. This is the essential concept behind principle 1.  To further understand this principle, we can think about the famous adage: **“there is no such thing as a fr****ee lunch.”**

Let’s say for an instant your classmate Sally suddenly offers you to take out for a free lunch. Instantly, you realize that this lunch isn’t really free. As expected, the next day Sally asks you to help her for her upcoming calculus test. In this scenario, the lunch had the cost of the time it will take you to help your friend Sally.

Like the example above, we have hundreds of trade off daily. However, the most important trade off we will learn in economics is between **efficiency** and **equity**. Efficiency is the property of society getting the most it can form its scarce resources. If Coldstone ice cream company is making 100 cones and Baskin Robins is making 70 cones with the same resources given, Cold stone is more efficient.

Equity in the other hand is the property of distributing economic prosperity fairly among members of society. For example, if we divide the ten pizzas equally among everyone in a birthday party, that will be most equitable distribution.

Learning about trade off is extremely important because it allows people to make good decisions knowing their given **choices**.


 * PRINCIPLE 2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT!**

= = = = <span style="font-family: Verdana,Geneva,sans-serif;"> Principle 2 is an extension of principle 1. Because people is aught to face trade-offs, they must learn how to **weigh the cost and benefits** of a decision. **Opportunity cost** is the “cost” of your action in economic terms. Opportunity cost is whatever you give up to gain a certain item. For instance, when you use your time to study for the Economics test instead of the English test, the opportunity cost will be your English grade. (Of course, this is under the assumption that you will fail your test, if you don’t study.)

In economics, we are often forced to make assumptions. One of such assumption that economists make is that people make rational decisions**. Rational people** do their best to achieve their objectives. Moreover, rational people make rational decisions thinking at the **margin**. Thinking at the margin involves **weighing the marginal benefits and marginal costs**. Marginal changes is defined as adjustments that involve small **incremental** changes. By making such small changes, we can sometimes benefit and other times suffer. We can look at an example to understand the concept of marginal changes. Let’s say for a instant that you are a boss of a company and have a choice to hire one more worker. The marginal benefit you gain by hiring one more worker is 1000 won worth of production. While, the wage of a worker is 2000 won. In this sense, the marginal cost outweighs the marginal benefit. Therefore, a rational person will decide not to hire one more worker.
 * PRINCIPLE 3: RATIONAL PEOPLE THINK AT THE MARGIN**

We hear about the word **“incentive”** everywhere. Last time when my mom wanted my brother to get a better grade, she gave him an incentive by saying “I will buy you an IPOD, if you ace your science test.” Same works for in economic systems: incentive is something that induces a person to act.
 * PRINCIPLE 4: PEOPLE RESPOND TO INCENTIVES**

One of the biggest incentive we study in Economics is price. Depending on the change in price, the behavior of a person also is induced to change. For example, if there is a sudden rise in price of a ice cream, you will be less inclined to buy it. On the contrary, if there is a sudden fall in price, you will be likely to buy more than what you used to desire.

Considering the price as a incentive is extremely important especially in governmental inventions such as taxes. When thinking about how much tax the government should impose, policy makers need to think about how much change in behavior will take place by that incentive.

<span style="font-family: Verdana,Geneva,sans-serif;">__Principles that deal with HOW PEOPLE INTERACT__
<span style="font-family: Verdana,Geneva,sans-serif;">
 * PRINCIPLE 5: TRADE CAN MAKE EVERYONE BETTER OFF**

<span style="font-family: Verdana,Geneva,sans-serif;"> News often illusions us to thinking that there is a LOSER and a WINNER in international trade. However, Economics tells us trade in fact can make EVERYONE better off. Why? There are several reasons. First, trade allows countries to realize what they are good at as well as what they are bad at. This ultimately leads a country to be efficient by allowing them to “specialize.” More over, allowing trade grants consumers of greater variety of choices. Because Korea has opened up free trade, people can choose what cars they will like to drive.

There are different types of economic systems in this world starting from communism to the most commonly seen market economy. However, as we can see by the overwhelming majority of countries that adopted market economy, markets are usually a good way to organize economic activity. [Notice the wording usually, it doesn’t ALWAYS work!] The reason? Well, it’s because of the INVISIBLE HAND. The theory of invisible hand by the famous economic Adam Smith states that everyone is selfish, but in the end it ends up benefiting everyone.
 * PRINCIPLE 6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY**

Hard to understand, right? Well, let’s imagine a applicable situation. Let’s say there is two competing meat stores in your neighbor. Mr.B of YUMMY MEAT STORE is worried about the dropping revenue resulted from his competition. In result, he decides to improve his meat quality to attract more consumers. Even though the decision of Mr.B to improve the meat quality was purely based by selfish goals, it ends up benefiting the consumers as well: now consumers can have better meat. In the end, Mr.B is happy because he gets more money and consumers are happy because they can eat better meat. This IS the power of invisible hand.

Notice that principle 6 states that markets is **USUALLY** a good way to organize economic activity. At other times, market experiences market failure, a situation in which market fails to allocate its resources efficiently. Two types of market failures are **EXTERNALITY** and **MARKET POWER**.
 * PRIN****CIPLE 7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES**

Externality refers to impact of one person on a welfare of an uninvolved bystander. For instance, an externality can refer to how Australia is suffering from the hole in the ozone layer. Even though Australia did little to contribute to such tragedy, the irresponsible acts of other countries such as China has led Australia to suffer the consequences. This situation can be referred as “negative externality.” To remedy this particular type of market failure, governments can take various actions such as imposing restrictions and fines. These governmental policies often improve market outcomes.

Market power refers to one firm having a overwhelming influence on price of the market. This is what we often refer as MONOPOLY of a firm. Governments can also remedy such problem through ways such as imposing a restriction on the price or making the firm a governmental organization.

<span style="font-family: Verdana,Geneva,sans-serif;">__Principles that are involved with HOW THE ECONOMY as a whole works__
<span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">

<span style="font-family: Verdana,Geneva,sans-serif;">PRINCIPLE 8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES
<span style="font-family: Verdana,Geneva,sans-serif;">

What is the reason behind United State’s prosperity and Africa’s poor living standards? The answer according to economists is because US had a high productivity compared to Africa. **Productivity** refers to the quantity of goods and services produced from each hour of a worker’s time. When one is able to increase its productivity,it is able to increase the income level of people and therefore is able to improve the country’s standard.

Economists often claim “inflation is the greatest enemy of an economy.” This is quite justifiable when we think back the economical depression the world went through in the last century. When Zimbabwe suffered severely from an economic depression, the reason was INFLATION. Inflation is an increase in overall prices in economy. When government prints too much money, the value of money goes down. To compensate loss in value, people raise the price, leading to overall increase in price.
 * PRINCIPLE 9: PRICE RISE WHEN GOVERNMENTS PRINTS TOO MUCH MONEY** <span style="font-family: Verdana,Geneva,sans-serif;">

Even though inflation is indeed an evil in the long term, in the short term it has many benefits. First, increasing the amount of money stimulates the overall level of spending amongst consumers. Thus, the demand goes up for overall goods and services. This higher demand prompts firms to raise the price as well as quantity of production. Because higher demand induces higher price, they end up hiring more workers to produce more goods. When companies higher more workers, this temporarily solves the problems of unemployment.
 * PRINCIPLE 10: SOCIETY FACES A SHORT RUN TRADE OFF BETWEEN INFLATION AND UNEMPLOYMENT**

This short term trade explains the concept of business cycle. Business cycle refers to fluctuations in economic activity such as employment and production. Business cycle allows us to analyze and make decisions based on short run and long run spectrum.

<span style="font-family: Verdana,Geneva,sans-serif;"> == <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> 1. When two persons trade goods: <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> 2.Even though markets do a great job in organizing economic activity, governments are needed to do all of the following EXCEPT: <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> 3. <span style="font-family: Verdana,Geneva,sans-serif;"> a. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> relentless increases in the productivity of labor over the years. || <span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">a. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> one person always gains at the expense of the other. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">b. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> both persons usually gain from the exchange. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">c. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> one person usually gains at the expense of the other. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">d. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> the overall well being of the two persons remains unchanged. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">a. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> establish and enforce property rights. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">b. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> intervene when markets fail due to externalities. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">c. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> intervene when markets fail due to market power. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">d. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> decide what and how much should be produced. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">Living standards in the United States have risen tremendously over the years, mainly due to: || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;"> ||
 * || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">b. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> the forceful efforts of labor unions. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">c. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> successive increases in the minimum wage. ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">d. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> trade protection from competition from countries with low wages, such as China. || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;"> ||

<span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">business cycle || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">fluctuations in economic activity, such as employment and production ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">economics || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the study of how society manages its scarce resources ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">efficiency || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the property of society getting the most it can from its scarce resources ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">equity || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the property of distributing economic prosperity fairly among the members of society ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">externality || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the impact of one person’s actions on the well-being of a bystander ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">incentive || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">something that induces a person to act ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">inflation || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">an increase in the overall level of prices in the economy ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">marginal changes || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">small incremental adjustments to a plan of action ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">market economy || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">market failure || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">a situation in which a market left on its own fails to allocate resources efficiently ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">market power || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">opportunity cost || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">whatever must be given up to obtain some item ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">productivity || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the quantity of goods and services produced from each hour of a worker’s time ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">property rights || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the ability of an individual to own and exercise control over scarce resources ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">rational people || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">people who systematically and purposefully do the best they can to achieve their objectives ||
 * <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">scarcity || <span style="font-family: Verdana,Geneva,sans-serif; font-size: 140%;">the limited nature of society’s resources ||

=<span style="font-family: Verdana,Geneva,sans-serif;">SING ALONG: CLICK AND LISTEN TO YOUR CHAPTER 1 REVIEW SONG = <span style="font-family: Verdana,Geneva,sans-serif;"> ADAPTED MELODY FROM SESAME STREET :D

LYRICS: Econ song. Covering ten concepts.

On my way to Explore scarcity.

Can you tell me how to get how to get opportunity cost?

Come and think Everything rationally

Friends and families there We all respond to incentive

Can you tell me how to get how to get to free trade?

How to see why market is good How to improve market outcomes How to improve living standards How to weigh costs of inflation

How to do well in ap econ class.

=<span style="font-family: Verdana,Geneva,sans-serif;">__**BIBLIOGRAPHY**__ = <span style="font-family: Verdana,Geneva,sans-serif;"><span style="font-family: Verdana,Geneva,sans-serif;"> Pictures: http://www.law.msu.edu/amicus/su_2003/current_media/D-Cutler-Illustration-23040.jpg http://greenewable.files.wordpress.com/2008/10/invisiblehand.jpg http://whyfiles.org/173skin_cancer/images/ozone_hole.jpg http://i.zdnet.com/blogs/dollar_toilet-from-chuck-penzi.jpg http://images.google.com/imgres?imgurl=http://i641.photobucket.com/albums/uu134/Phlower911/gradeA.jpg&imgrefurl=http://www.myspace.com/geekme&usg=__EO6LkqN1Eliq9uXyp7EJtzwo8X8=&h=378&w=390&sz=15&hl=en&start=2&sig2=STv_KYZvA9FnmaD5RwEIIA&um=1&tbnid=LuZZIzWLhfDGvM:&tbnh=119&tbnw=123&prev=/images%3Fq%3Dgrade%26hl%3Den%26client%3Dfirefox-a%26channel%3Ds%26rls%3Dorg.mozilla:en-US:official%26um%3D1&ei=rL9GS8rxFJO6tAP4ufz1Dw http://www.strom.clemson.edu/becker/prtm320/opport.gif__// //__Pictures: http://www.law.msu.edu/amicus/su_2003/current_media/D-Cutler-Illustration-23040.jpg http://greenewable.files.wordpress.com/2008/10/invisiblehand.jpg http://whyfiles.org/173skin_cancer/images/ozone_hole.jpg http://i.zdnet.com/blogs/dollar_toilet-from-chuck-penzi.jpg http://images.google.com/imgres?imgurl=http:__//__i641.photobucket.com/albums/uu134/Phlower911/gradeA.jpg&imgrefurl=http://www.myspace.com/geekme&usg=__EO6LkqN1Eliq9uXyp7EJtzwo8X8=&h=378&w=390&sz=15&hl=en&start=2&sig2=STv_KYZvA9FnmaD5RwEIIA&um=1&tbnid=LuZZIzWLhfDGvM:&tbnh=119&tbnw=123&prev=/images%3Fq%3Dgrade%26hl%3Den%26client%3Dfirefox-a%26channel%3Ds%26rls%3Dorg.mozilla:en-US:official%26um%3D1&ei=rL9GS8rxFJO6tAP4ufz1Dw http://www.strom.clemson.edu/becker/prtm320/opport.gif