Economics is about
Scarcity: The Limited nature of society’s resources
Natural resource, land and worker’s time re all limited in its availability
Economics is about how the society manages its limited resources.
Firms: what to produce, how much to produce, how many workers to hire, etc
How people make Decisions
Principle #1 People face tradeoffs
-To get one thing, we usually have to give up something else.
-Think of the allocations of your time and money.
If you buy a new iPhone today, you have to wait before buying a new laptop
▯ IF you invest in a stock, you are giving up other forms of investments, such as
▯ RESP and bonds.
▯ For Every hour you spend on studying, you could have worked
Society faces the tradeoff between efﬁciency and equity.
Efﬁciency: Getting the most out of resources.
Equity: fairness of economic allocation/prosperity
Efﬁciency can be referred to the economic pie, and equity to how the economic pie is
divided amount society’s members.
Principle #2 The cost of something is what you give up to get it
Opportunity cost: What you give up to obtain something.
▯ To become a doctor, you need to go to medical school. In addition, you are giving
▯ up other career paths.
▯ Waiting in a long line for a free item costs your time.
▯ ▯ ▯ There is no such thing as a free lunch
Principle #3: Rational People think at the Margin
Rational People: Someone always tries to do their best to achieve their objectives.
In economics, we usually assume the ﬁrms’ objective is to maximize its proﬁt and
consumers’ objective is the achieve the highest level of satisfaction/
Marginal changes: Small incremental adjustments to an existing situation or plan.
Rational people make decisions by comparing Marginal beneﬁts and Marginal costs
▯ Suppose you have already eaten 3 tacos. weather to have an extra taco depends
▯ on the price of the taco (Marginal cost) and the extra satisfaction it gives
▯ (marginal beneﬁt)
To study one more hour the night before the exam has beneﬁts and costs (less sleep) Principle #4 People Respond to incentives
Incentive: something, such as a punishment or reward, that includes action.