Chapter+1-+Ten+Principles+of+Economics+(09-10)



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In this chapter, we are going to learn about how people make decisions, economy works as a whole, how people interact.

QUESTION TO KEEP IN MIND: What is economics?

**Scarcity**  - The limited nature of society's resources **Efficiency**  - The property of society getting the most it can from its scarce resources **Opportunity** ** Cost ** - Whatever must be given up to obtain some item **Rational People** - People who systematically and purposefully do the best they can to achieve their objectives **Incentives**  - Something that induces a person to act **Market Economy** - An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services **Property Rights** - The ability of an individual to own and exercise control over scarce resources <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">**Market Failure** <span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - A situation in which a market left on its own fails to allocate resources efficiently <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">**Market Power** <span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - 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;"> <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">**Productivity** <span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - The quantity of goods and services produced from each hour of a worker's time <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">**Inflation** <span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - An increase in the overall level of prices in the economy <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">**Business Cycle** <span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;">- Fluctuations in economic activity, such as employment and production
 * __<span style="display: block; font-family: Verdana,Geneva,sans-serif; font-size: 99%; text-align: left;">Words to keep in mind: __ **
 * <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">Equity **<span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - The property of distributing economic prosperity fairly among the members of society
 * <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">Marginal Changes **<span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - Small incremental adjustments to a plan of action
 * <span style="color: #520545; font-family: Verdana,Geneva,sans-serif; font-size: 90%;">Externality **<span style="font-family: Verdana,Geneva,sans-serif; font-size: 90%;"> - The impact of one person's actions on the well-being of a bystander

**[HOW PEOPLE MAKE DECISIONS]**

**<span style="color: #ff00ff; font-family: Verdana,Geneva,sans-serif; font-size: 120%;"> 1. People Face Trade-offs. **<span style="font-family: Verdana,Geneva,sans-serif;"> - In order to make decisions, it requires trading off one goal against another. - Some trades there is one side that loses and a side that wins. - A good trade is when it is both ** equitable ** and ** efficient **.

- To make decisions, people need to compare the costs and benefits. - There are always ** opportunity costs ** - The costs aren't as obvious as it appears
 * 2. The Cost of Something is What You Give Up to Get it. **



- ** Rational People ** compares the cost. - **Marginal Change** is creating adjustments around the edge (usually small changes). - Decision-makers only take actions when: marginal benefit of action > marginal cost.
 * 3. Rational People Think at the Margin. **

- Behavior is changed when costs or benefits are changed. - If the benefit is positive, then more people would take action. - If the benefit is negative, then less people would take action. - Example: tax on gas --> encourages less driving --> creates more fuel-efficient cars.
 * 4. People Respond to incentives. **


 * [HOW THE ECONOMY WORKS AS A WHOLE]**

- Each person can specialize in his/her activities at what they do best. - Positive aspects for Trading: - Can get a greater variety off goods or services. - Less Opportunity Cost. - Become equally efficient.
 * 5. Trade Can Make Everyone Better Off. **

- In a **Market Economy**, firms decide who to hire and what to make, and households decide which firms to work for and what to buy. - Prices and self-interest guide the decisions. - Free Markets have many buyers and sellers of numerous goods and services. - Market economies shows the way of organizing economic activity that promotes overall economic well-being.
 * 6. Markets Are Usually a Good Way to Organize Economic Activity. **

** 7. Governments Can Sometimes Improve Market Outcomes. ** - Markets only work if **property rights** are applied. - The //invisible hand// is powerful and can control the economy. - But it may also fail to make certain that prosperity is equally distributed. - ** Market failure ** is caused by **externality**. - An example externality is pollution. - Market failure is caused by **market power**. - With externalities' or market power presence, public policy can make the economy more efficient. - Government can step in and change the outcome through public policy.

**<span style="font-family: Verdana,Geneva,sans-serif; font-size: 120%;">[HOW PEOPLE INTERACT] ** - The nation's average income increases when nation's **productivity** grows. - Countries enjoy higher standard of living if the workers produce a larger quantity of goods and services per unit of time.
 * 8. A Country's Standard of Living Depends on its Ability to Produce Goods and Services. **<span style="font-family: Verdana,Geneva,sans-serif;">[[image:inflation-cartoon.jpg width="382" height="300" align="right"]]

<span style="font-family: Verdana,Geneva,sans-serif;">** 9. Prices Rise When the Government Prints Too Much Money. ** - **Inflation** happens when the government prints too much money. - This means that the value of the money fall, money becomes common in society. - Price of goods increase, which then requires more money to be paid to buy the products.

<span style="font-family: Arial,Helvetica;"> - Reducing inflation effects to unemployment. - The trade-off that happens helps the people understand more about the changes in taxes, government spending, and monetary policy.
 * 10. Society Faces a Short-Run Trade-off Between Inflation and Unemployment. **

**<span style="color: #ff00ff; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">Bibliography 1 ** <span style="font-family: Verdana,Geneva,sans-serif;">

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Conclusion: In this chapter, we learned about the ten priciples of economics. We now have basic ideas about what economics is about how how it works. From next chapters, we are going to learn more about each principles in detail.