Introduction to Macroeconomics
Principles of economics
Economy: Greek word word for “one who manages a household”. The management of society's
resources (ex: people, land, buildings, machinery) is important because resources are scarce. It
is the study of how society manages its scarce resources.
Scarcity: The limited nature of society's resources.
Economics: The study of how society manages its scarce resources
Principle #1: people face tradeoffs
“There ain’t no such thing as a free lunch”
● Efficiency: The property of society getting the maximum benefits from its scarce
● Equity: The property of distributing economic prosperity fairly among the members of
Principle #2: The cost of something is what you give up to get it
● Opportunity cost: whatever must be given up to obtain some item.
Principle #3: Rational people think at the margin
● 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.
Principle #4: People respond to incentives
● Incentive: Something that induces a person to act.
Principle #5: Trade can make everyone better off
● Property rights: The ability of an individual to own and exercise the control over scarce
Principle #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 are guided by an “invisible hand” that
leads them to desirable market outcomes.
● In his 1776 book, Adam Smith observed that households and firms interacting in markets
acts as if they are guided by an “invisible hand” that leads them to desirable market
Principle #7: Gouvernements can sometimes improve market outcomes
● We need gouvernements for two reasons
○ To enforce property rights
■ Property rights: The ability of an individual to own and exercise control
over scarce resources.
● Because the invisible hand is powerful, but it is not omnipotent.
○ Two broad reasons for the government to intervene in the economy; 1)
the goal of efficiency 2)the goal of equity