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1. 10 Principles of Economics.docx

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ECON 102
Maryann Vaughan

10 Principles of Economics January-07-13 2:36 PM Scarcity: limited nature of society's resources Economics: the study of how those scarce resources are managed 1. People face tradeoffs  All descisions face tradeoffs  Society faces an important tradeoff  Efficiency vs equity  Efficiency is society maximizing the use of the scarce resources  Equity is when the prosperity is distributed uniformly among society's members  Tradeoff: to achieve greater equality, could redistribute income from the wealth to the poor. But this reduces the incentve to work and produce, decreasing efficiency. 2. The cost of something is what you give up to get it  Comparing the costs and benefits of the alternative choices  The opportunity cost. 3. Rational people think at the margins  Rational people  Do the best they can to achieve their objectives  Make descisions by evaluating costs and benefits of marginal changes - incremental adjustments to an existing plan.  Use all information available to them in their own best interests. 4. People respond to incentives  Incentives: something that induces a person to act  Reward or punishment  e.g. When gas prices rise, people buy more hybrids and less SUVs 5. Trade can make everyone better off  Rather than being self sufficient, people can specialize in producing one good or service and exchange it for other goods.  Countries also benefit from trade and specialization  Get a better price abroad for goods they produce  Buy other goods more cheaply from abroad than they could be produced at home 6. Markets are usualy a good way to organize economic activity  Market: a group of buyers and sellers (need not be in a single location)  Organize economic activity is determining  What to produce  How to produce  How much to produce  Who to produce for  A market economy allocates resources through the decentralized decisions of many househol
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