Chapter+I+Ten+Principles+of+Economics

= = =Chapter 1. = =10 Principles of Economics =

= = =Definitions=

Scarcity: The limited nature of society's 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 allocated 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

=LEARNING OBJECTIVES:= By the end of this chapter, students should understand: o Economics is about the allocation of scarce resources. o Individuals face trade-offs. o The meaning of opportunity cost. o Rational people think at the margins. o Incentives affect people's behavior. o Why trade is good for everyone. o Markets are a good way to allocate resources.

I. Introduction

 * 1) The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.”
 * 2) If you think about it, the definition is related to the origin of the word since people have to make decisions to manage themselves. (just as a household is).
 * 3) Fundamental economic problem is that resources are scarce and people cannot satisfy everything they need.
 * 4) The most important fundamental of economics is **scarcity**. The definition of scarcity is the limited nature of society’s resources.
 * 5) From the definition of scarcity, definition of economics can be derived. It means the study of how society manages its scarce resources.
 * 6) In ten principles of economics, everything the students should learn about economics will be covered, and will be explained in depth in preceding chapters.

II. How people make decisions
=**Principle #1: People Face Trade-offs**=

a. Making decisions requires trading one goal for another. Examples include how students spend their time, how a family decides to spend its income, how the US government spends tax dollars, and how regulations may protect the environment at a cost to firm owners. b. A special example of a trade-off is the trade off between efficiency and equity i. What is **efficiency** ? the property of society getting the most benefits from its scarce resources. ii. What is **equity**? The property of rationing economic prosperity fairly among the members of society. iii. For example, tax dollars paid by wealthy Americans are distributed to those less fortunate, which improves equity but not necessarily efficiency. iv. This implies that the cost of this increased equity is a reduction in the efficient use of our resources. c. Recognizing that trade-offs exist doesn’t indicate what decisions should or will be made.

=**Principle #2: The cost of something is what you give up to get it**=

a. Making decisions requires individuals to consider the benefits and costs of some actions. For example, what are the costs of going to college? It includes everything such as tuition, room and boards, textbooks, and implicit things like time and other resources. b. What is **opportunity cost**? Whatever must be given up in order to obtain the item. As a result, the true cost of going to college not only includes the "external" cost of tuition fees and board, but the "implicit" cost of what you have given up to get the college education.

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

a. Economists generally assume that people are rational. i. What is being rational? systematically and purposefully doing the best you can to achieve your objectives ii. Consumers want to purchase the bundle of goods and services that allows them the greatest level of satisfaction given their incomes and the prices they face. iii. Firms want to produce the level of output that maximizes the profits they earn. b. Many decisions in life involve incremental decisions: Should I remain in school this semester? Should I take another course this semester? Should I study an additional hour for tomorrow’s exam? i. What is **marginal changes**? Small incremental adjustments to a plan of action. ii. Example: suppose that launching 200-seat Girl's Generation concert across the country costs the company $50,000 which means that the average cost of each seat is $250. Suppose that the concert is about to start and a person is willing to pay only $100 for a seat. Should the company sell the seat for $100? Of course, because in this case, the marginal cost of of an additional passenger is very small and it is better to earn $100 than earn nothing.

=**Principle #4: People Respond to incentives.**=

a. What is an **incentive**: something that instigates a person’s action b. Because rational people make decisions by weighing costs and benefits, their decisions change in response to incentives i. When the price of good increases, consumers will buy less of it because its cost has risen. ii. When the price of a good rises, producers will allocare moe resources to the production of the good because the benefit from producing the good has risen. c. Many public policies change the costs and benefits that people face. Sometimes, policymakers fall to understand how policies alter incentives and behavior because they cannot take everything into account in design a "perfect" regulatory laws. media type="youtube" key="AfIJqbdRyBs" height="344" width="425" http://kr.youtube.com/watch?v=AfIJqbdRyBs

III. How People Interact
=**Principle #5: Trade can make everyone better off.**=

a. Trade is not like a sports competition, where one side gains and the other side loses b. Consider trade as something that takes place inside your neighborhood. Your family is likely to be involved in trade with other families on a daily basis. Most families do not build their own homes, make their own clothes, or grow their own food. c. Countries benefit from trading with one another as well, we will cover this in chapters following. d. Trade allows for specialization in products that countries (or families) can do best because it gives them comparative advantages in producing that good, which means they are better than others in producing the good at a smaller cost (includes opportunity cost). media type="youtube" key="NDC34xe_Xu4" height="344" width="425" http://kr.youtube.com/watch?v=NDC34xe_Xu4

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====//EU relations with China were established in 1975. Today, the EU is China’s second largest trade partner, with China being the EU’s largest partner. The main objectives of EU policy towards China are to working together on global challenges such as climate change,encourage the ongoing integration of China into the world economy and trading system, and raise the EU’s profile in China, to aid mutual understanding. China has been moving away from the status of a traditional recipient of overseas development assistance towards that of a strategic partner with whom the European Union engages on a wide range of policy issues. China is also becoming an increasingly important source of aid to other developing countries. Through trade, China and EU are getting what they lack.//====

//Of course, it would not be nice to trade CRAPPY stuff with each other like You-Know-Who.//

 * ==Trade Makes Everyone Happy!==

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======================================================================== =Principle #6: Markets Are Usually a Good Way to Organize Economic Activity=

**market economy**: An economic system in which economic decisions of pricing goods and services are guided by many firms and households as they interact in markets.
====Most countries today adopted a market economy instead of central planning where only the government could organize economic activity in a way that promoted economic well-being for the country as a whole. In __An Inquiry into the Nature and Causes of the Wealth of Nations__ by Adam Smith, it talks about how "invisible hand" guides the economic activities. In any market, buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply. As a result of the decisions that buyers and sellers make, market prices reflect both the value of a good to society and the cost to society of making the good.====

=Principle #7: Governments Can Sometimes Improve Market Outcomes=

**market power**: the ability of a single or few economic participant to alter the market price. ex) monopoly
====Government regulations on economy is necessary when it properly enforces the rules and maintains the institutions that are key to a market economy. A government intervenes when market failure occurs due to externality, market power, and etc. In addition, the invisible hand may fail to ensure that economic prosperity will be distributed among the participants equally. The government can improve on market outcomes by allocation of resources to promote efficiency and to promote equity.====

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

**productivity:** productivity is a ratio to measure how well an organization (or individual, industry, country) converts input resources (labor, materials, machines etc.) into goods and services.
====The growth rate of a nation's productivity determines the growth rate of its average income. In addition, most people enjoy a high standard of living in nations where workers can produce a large quantity of goods and services per unit of time. However, people don't where workers are less productive. The relationship between productivity and living standards are closely related and has profound implications for public policy. For example, when a policymaker wants to improve the standard of living, he would raise productivity by using certain ways.==== http://www.progressdaily.com/wp-content/uploads/2006/09/gdp.gif

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A country cannot stand when the productivity is relatively low.
media type="youtube" key="VADcyxlO_PA&hl=ko&fs=1" height="344" width="425" http://video.google.com/videoplay?docid=6053080664047025392&ei=_q3ISJDpOpSYwgPY0sHnDw&q=market+failure&vt=lf

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

**Inflation:** A sustained rise in most prices in the economy.
====What causes inflation? Quantity of money. When the government creates large quantities of the nation's money, the value of the money falls as it is not scarce and people waste it in buying goods, driving up the price.====

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

__★inflation↑(Short Term): Spending↑ Demand↑ → Quantity Supplied↑ Workers↑ → Unemployment↓__
====In this curve, an unemployment rate of 7% seems to correspond to an inflation rate of 4% while an unemployment rate of 2% seems to correspond to an inflation rate of 6%. As unemployment falls, inflation increases. However, the equation only holds in the short term. In the LONG RUN, unemployment always returns to the natural rate of unemployment, making cyclical unemployment zero and inflation equal to expected inflation.==== ====The short-run trade-off has a great impact on the business cycle as well. So the policymakers carefully change the amount that the government spends, the amount it taxes, and the amount of money it prints.====

1. Mike is a street vendor who sells sodas and ice cream. Suddenly, he meets Ku-Hara, a member of KARA asking for him to sell her the ice cream at $3 in exchange for the autograph that has a value of around $20. The ice cream costs $10. Should Mike sell the ice cream? 2. What is the opportunity cost of reading a book?