Chapter+1+Ten+Principles+of+Economics+Joon,+Scott,+and+Steven

Ten Principles of Economics


 * Key Terms **


 * Scarcity**//:// the limited nature of society's resources
 * Economics**//:// the study of how society manages its scarce resources
 * Efficiency**//:// the property of society getting the most it can from its scarce resources
 * Equity**//:// the property of distributing economic prosperity fairly among the members of society
 * 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
 * Marginal Changes**//:// small incremental adjustments to a plan of action
 * Incentive**//:// 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
 * Market Failure**//:// a situation in which a market left on its own fails to allocate resources efficiently
 * Externality**//:// the impact of one person's actions on the well being of a bystander
 * Market Power**//:// the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
 * Productivity**//:// the quantity of goods and services produced from each hour of a worker's time
 * Inflation**//:// an increase in the overall level of prices in the economy
 * Business Cycle**//:// fluctuations in economic activity, such as employment and production

To make everything simple, let's view the whole society as one's household. In fact, let's view it as a household of Steven. Steven, as a household, faces many decisions: Which members of the house will do what jobs? Which member's responsible for preparing meals? Laundary? Similarly, society must make many decisions: What sort of jobs will it provide and who will do them? Who will grow foods? Who will make clothes? Who will develop comupters?

Such management is important because these resources are scarce. Scarcity means the limited nature of society's resources. Because there are limitations to these resources, the society's responsible to mange these scarcities. Societies cannot give everyone the highest possible standard of living. That explains why we have people who ride Ferrari and people who take public subways.

Economics basically is the study of how socities manages their scarce resources. And there are total of TEN basic principles you should know about Economics.

**Principle 1: People Face Trade-offs**

I'm sorry to tell you this folks, but the very first principle is that NOTHING IS FREE. You cannot have something you like without sacrificing something else. Getting what you desire by giving away something of yours is the basic idea of trade-offs. For example, let's refer back to Steven. He really wants to get an A on his AP Economics' Online Textbook Project. But in order to do so, he must give up part of time. This time may be his time to finish another classes' homeworks, or it may be his free time of playing an online game, World of Warcraft.

Society is the same. The classic example is the trade-off between "guns and butters". A society must give up part of its spending on its military (guns) in order to spend more and improve on its standar of living (butters), and vice versa. Another huge trade-off a society must make is the trade-off between efficiency and equity. Efficiency allows the society to gain its maximum benefits possible from its scare resources. On the other hand, equity allows the society to have same amount of benefits to every members of the society. To make it simple, efficieny is like the size of the pie (how big can it get), while equity is like the way the pie is divided (so everyone gets the same amount).




 * Principle 2: The Cost of Something is What You Give Up to Get It **

Because people face trade-offs, people also need to realize whether their costs of getting the resource they desire is satisfying. For example, let's bring back our dear old friend ,Steven. He has just been accepted to Harvard University. Now, he wonders whether he's willing to give up his costs in order to achieve the benefits of attending the university. The benefits may be an intellectual enrichment, and four or more years of unforgettable memories. Yet, his costs can be the ridiculous amount of the tuition fee, along with other minor spending of money on food, clothing, dorm, and his time (he may do unlimited amount of other things if he decides to not spend his next four or more years in Harvard). This links to the term opportunity cost, which is the idea of giving up one's value/items in order to obtain one's desired resources.


 * Principle 3: Rational People Think at the Margin **

A society must also realize that there are rational people, who systematically and purposefully do the best they can to achieve their objectives. These rational people often make decisions by comparing their marginal changes. In ecnomics, marginal often refers to "edges". Thus, you can interpret marginal changes as the adjustments around the edges. Marginal changes include marginal benefits and marginal costs. Marginal benefit is the amount of benefit you get when achieving an additional resource, while marginal cost is the amount of cost it takes to obtain an additional resource. Rational people often take actions only if the marginal benefit exceeds the marginal cost. Principle 4: People Respond to Incentives **

People respond to incentives. Incentives are "something" that induces a person to act. Notice the word "something". This signifies that incentives can be various different things. For example, an increase in price of McDonalds will allow people to have incentive and go to Burger King instead, or vice versa. Or take Lebron James for example. He had an incentive of a brighter future by heading straight to NBA after his highschool years. Although he had to skip his college, the possible successful basketball career allowed him to choose NBA instead.




 * Principle 5: Trade Can Make Everyone Better Off **

Do not view the economic competition like the competition in sports. United States is not competiting with Japan to declare who is betterl. Instead, they are simply trading with one another to make both better off. For example, Steven's family may go out shopping. Each member tries to buy the best product at the lowest price; thus, in some ways, there may be some competition between all other families that have also went to shop. But if Steven's family was to isolate themselves from everyone else, they would only make themselves harder. They would have to provide their own food, clothes, and build their own house. The same concept applies to economics. Nations rarely isolate themselves, because they want to receive various different types of resources available worldwide. With trade, it allows each nations to specialize in certain resources in which they do best. By trading, they can only focus on their own specialized products, while receiving other desired resources from other nations.

**Principle 6: Markets are Usually a Good Way to Organize Economic Activity**

Market economy is the key concept when dealing with the economies. In fact, it is what majority of the world follows to this date. Market economy is the system of economy in which it is controlled by us - the millions of firms and households. The firms are the ones that decide whom to hire and what to make (producers), while the households are the ones that decide which firms to work for and what to buy (consumers). Together, they make a great team. Adam Smith also proposed the idea of the "invisible hand", which is the ability of the market economy to maximize the welfare of the society as it reflects both producer's willingness to sell and the cosumer's willingness to buy.


 * Principle 7: Governments Can Sometimes Improve Market Outcomes **

Well, but there are exceptions (as always). There are times when government do involve in the market economy. One of the main reason why government involves in market economy is to provide property rights. Property rights gives individuals the right to own and exercise control over certain resources. Without property rights, farmers would get their crops stolen, people will leave restraurant without paying, or CDs will be illegally copied (not 100% guranteed). Another reason is to prevent from market economies to meet market failures. Market failure occurs when a market fails to allocate resources efficiently. This may occur due to externality, which is the impact of one person's action on a bystander, or market power , which is the ability of a single economic actor to have substantial incluence in the market (monopoly).


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

Although many nations practice the same market economy system, they all provide separate different standars of living. Mystery, right?

Well not quite. The answer is quite simple - productivity. Productivity is the quantiy of goods and services produced from each hour of a worker's time. Productivity is the key value to look at when determining a nation's standard of living. The more productive a nation is, the higher its standard of living will be, or vice versa.

**Principle 9: Prices Rise When the Government Prints Too Much Money**

President Ford once referred the inflations as "public enemy number one". Inflations are an increase in the overall level of prices in the economy. One of the main goals economists try to achieve is to stop from any possible inflations from occuring. Yet, why do they occur? Inflations often occur as a side effect when governments print too much money.

**Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment**

In short-run, societies seem to trade-off between inlfation and unemployment. Simply put, many societies seem to provide economic policies to either push away inflation while accepting unemployment or pushing away unemployment while accepting inflation. Such trade-off allows business cycles to occur. Business cycle is the irregular and unpredictable fluctuations in economic activity, such as employment and production.

The following podcast describe the ten principles, yet in much simpler version.



But I guess this following video describes it much simpler...

media type="youtube" key="VVp8UGjECt4" height="344" width="425"

So these are the essential ten principles of economics. These ten principles help the world's economy to function. Thus, you must follow it, or else...


 * Review Questions**

1. What is the difference between efficiency and equity?

2. Why do nations specialize?

3. Why do government get involved in market economies?

Answers 1. efficieny is like the size of the pie (how big can it get), while equity is like the way the pie is divided (so everyone gets the same amount). 2. With trade, it allows each nations to specialize in certain resources in which they do best. By trading, they can only focus on their own specialized products, while receiving other desired resources from other nations. 3. One of the main reason why government involves in market economy is to provide property rights. Property rights gives individuals the right to own and exercise control over certain resources. Without property rights, farmers would get their crops stolen, people will leave restraurant without paying, or CDs will be illegally copied (not 100% guranteed). Another reason is to prevent from market economies to meet market failures. Market failure occurs when a market fails to allocate resources efficiently. This may occur due to externality, which is the impact of one person's action on a bystander, or market power , which is the ability of a single economic actor to have substantial incluence in the market (monopoly).

Student produced resources: [|Quizlet Chapter 1] Sources

http://library.thinkquest.org/06aug/02297/M16.htm http://www.guardian.co.uk/lifeandstyle/wordofmouth/2008/sep/16/foodanddrink http://www.mouthpiecesports.com/media/lebron-james-gets-dunked-on-by-xavier-player-jordan-crawford-22014/ http://philsbackupsite.wordpress.com/2008/12/27/