EC120 Lecture Notes - Lecture 1: Externality, Omnipotence, Market Failure
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Economy word comes from greek word for one who manages a household . Scarcity refers to the limited nature of society"s resources in comparison to people"s desires/needs. Does not mean shortage, but everything has an alternative use arises from different wants. Decision making is at the heart of economics. 4 principles of individual decision making: people face trade-offs. Nothing is free to get one thing that we like, we must give up another thing that we like. All decisions involve trade-offs (opportunity cost): efficiency vs. equity. Efficiency: getting the most out of scarce resources (the size of the pie) Equity: distributing prosperity fairly among society"s members (how pie is distributed) Trade-off: to increase equity, can redistribute income from the well-off to the poor. But this reduces the incentive to work and produce, and shrinks the size of the economic pie. Due to trade-offs, making decisions requires comparing the costs and benefits of alternative choices.