CHAP 1 - 10 Principals of Economics:
-society reasources are scares (people, land, buildings, machinery)
-Scarciy: scoeity has limited resources, therefore cannot produce all the goods and
services he or she wants. Society cannot give each individual the highest standard
of living to which he or she may want.
Economics: study of how society manages its resources
-Economics help how people make decisions: How much they work, what they buy,
how much they save and how they invest in their savings. How buyers and sellers of
a good together determine the price which the good is sold at and the quantity that
-Analyze forces and trends. (growth of income, fraction of ppopulation that cannot
find work and rate of price rising).
4 Principals of Individual decision making:
Principal #1: People Face Tradeoffs: - making decisions reqiires trading off one goal
against another. (no such things as a free lunch) E.g parents deciding how to spend
their family income; they can buy food, clothing, or a family vacation (have to give
up something that we like to get one thing that we like).
efficiency: prooperty of society getting the most it can ffrom its scarce resources
equity:property of distributing economics prosperity fairly among the members of
(eficieny refers to size of econmic pie and equity refers to how the pie is divided)
Principal #2: Cost of something is what you give up to get it:
-Opportunity Cost: whatever must be given up to obtain some item. (e.g. college or
uni age athletes who can earn millions if they drop out of school and play
professional spots are well aware tht their oppotunity cost of a post-seconadary
education is very high.
Principal #3: RAtional People think at the Margin: -Rational People: who
systematically and purposefully do the best they can to avhieve their objective.
(rational peopple kno that decisons in life are rarely black and white but usually
involve shades of gray). e.g: when exams roll around ur decision is not between
blowing them off or studying 24 hours a day but whether to spend an extra hour
reviewing ur notes instead of watchin tv.
Economists use the erm Marginal Changes: to describe small incremental adjustments to an exisiting plan of action. ("margin" means eduge so marginal
changes are adjustments around the edges of what u are doing).
-Rational pepple often make decisions by comparing marginal benefits and marginal
costs.(e.g. humans need water to survive while diamo0nds are unnecesary; but for
some reason pepple are willing to pay much more for a diamond than a cup of
water. the reason is tht a persons willingness to pay for any fgood is based on the
marginal benefit that an extra unit of the good will gield. people consider the
maginal benefit of an extra diamond to be large.
Principal #4: People respond to Incentives: -Incentive" Something tht induces a
person to act (such as a prospect of a punishment of a reward). - rational people
make decisions by comparing costs and benefits, they respond to incentives. (e.g.
price of gasoline being high ecouraging more people to take public transportation)
Next three principals concern how pepple interact with one another:
Principal #5: Trade can make everyone better off: e.g canadian and u.s.a firms do
produce many of the same goods (compeition). Apple and Blackberry compete for
the same customers in the market for smart phones.
-Trade between two countries can make each country better off.
-trade allows each person to specialize in the activities he or she does best whether
its farming sewing or home building. by trading with others, people can buy greater
variety of goods and services at lower costs.
Principal #6: Markets are usually a good way to organize economic activity:
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. 9decisons of central planners are replaced by the decisions of millions of
firms and households).
-Firms decide whom to hire and what to make - Households decide which firm to
work for and what to buy with their incomes. - These firms and households interact
in the marketplace where price and self interest guide their decisions. “invisble
hand guiding economic activity”
-in any market, buyers look at the price when determing how much to demand and
sellers look at the price when deciding how much to supply.
Principal #7: Governments can sometimes improve market outcomes:
one reason we need government is because the ‘invisible hand’ can work its magic
only if the government enforces rules and maintains the instituitions that are key to
a market economy. property rights: the ability of an individual to own and exercise control ocer scare
resources.(e.g. a farmer wont grow food is he expects his crops to be stolen). we all
rely on gvt to provide police services and court - invisible hand counts on our ability
to enforce our rights.
-Another reason why we need government is because: the invisible hand is powerful
but it is not omnipotent.
-two reason why gvt would intervene in the economy and change the allocation of
resources tht people would choose on their own: TO PROMOTE EFFICENCY AND TO
PROMOTE EQUITY.-most policies aim to either englarge the economic pie or to
change how the pie is divided.
-although the ‘invisble hand’ usually leads markets to allocate resources efficiently,
this is not always the case.
-Market Failure: a situation in which a market left on its own fails to allocate
resource efficiently. (a possible cause of this is called ‘externality’).
-Externality: impact of one persons actions on the well-being of a bystander. (e.g
-Market Power: Another possibility of market failure. the ability of a single economic
actor(or small group of actors( to have a substantial influence on market prices.
-invisble hand may also fail to ensure that economic prosperity is distrubuted
equitably. e.g. the worlds best basketball player earns more than the worlds best
chess player becuz people are willing to pay more to watch basketball than chess.
-A market economy rewards pepple according to their ability to produce things that
other people are willing to pay for.
Last 3 principals concern the workings of the economy as a whole:
Principal #8: A countrys standard of living depends on it ability to produce goods
-Productivity: the quantity of goods and services produced from each hour of a
-citizens of high income countries have more tv sets, more cars, better nutrition and
better healthcare compared to citizens of low income countries.
-to boost living standards, policy makers need to raise productivity by ensuring that
workers are well educated, have the tools needed to produce goods and services
and have access to the best available technology.
Preincipal #9: Prices rise when the government prints too much money: Inflation: an increase in overall level of prices in the economy
- keeping inflation at a low level is a goal of economic policymakers around the
-growth in the quantity of money causes inflation; when gvt creates large quantities
of nations money, the value of the money falls.
Principal #10: Society faces a short-run tradeoff between inflation and
short-run effects of moneyary injections:
-increasing the amount of money in the economy stimulates the overall level of
spending and thus the demand for goods and services. - more hiring means lower
unemployment services and -higher demand may also cause firms to rain their
prices but in the meantime it also encourages them to increase the quantity of
goods and services they produce and to hire more workers to produce those goods
short run tradeoofff between inflation and unemployment: over a period of a year or
two, many economic policies push inflation and unemployment in opposite
directions. - plays a key role in the bussiness cycle.
-business cycle: fluctuation in ecnomic activity such as employment and production
(measured by the prpduction of goods and services or the number of people
-policymkers can exploit this tradeoff between inflation and unemployment by
chaging the amount the gvt spends, the amount it taxes etc.
CHAPTER 2 - Thinking like an Economist:
First Model; Circular-Flow Diagram: visual model of the economy that shows how
dollars flow through markets among households and firms. two types of people to
make decisons: house