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Economics Study Notes.docx

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Ryerson University
ECN 104
Tsogbadral Galaabaatar

Chapter 1 Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have Economics is the study of how society manages its scare resources In most societies resources are allocated not by a single central planner but through the combined actions of millions of households and firms Economists therefore study how people make decisions how much they work what they buy how much they save and how they invest their savings Economists also study how people interact with one another Finally economists analyze forces and trends that affect the economy as a whole including the growth in average income the fraction of the population that cannot find work and the rate at which prices are rising Although the study of economics has many facets the field is unified by several central ideasTen principles of Economics Principle 1People Face Tradeoffs There is no such thing as a free lunch To get one thing that we like we usually have to give up another thing that we like Making decisions requires trading off one goal against another When people are grouped into societies they face different kinds of tradeoffs The classic tradeoff is between guns and butterThe more we spend on national defence guns to protect our shores from foreign aggressors the less we can spend on consumer goods butter to raise our standard of living at home Another tradeoff society faces is between efficiency and equity Efficiency means that society is getting the most it can from its scare resources Equity means that the benefits of those resources are distributed fairly among societys members In other words efficiency refers to the size of the economic pie and equity refers to how the pie is divided Often when government policies are being designed these two goals conflict Recognizing that people face tradeoffs does not by itself tell us what decisions they will or should make Acknowledging lifes tradeoffs is important because people are likely to make good decisions only if they understand the options that they have availablePrinciple 2The Cost of Something Is What You Give Up to Get It Because people face tradeoffs making decisions requires comparing the costs and benefits of alternative courses of action In many cases however the cost of some action is not as obvious as it might first appear The opportunity cost of an item is what you give up to get that item When making a decision such as whether to attend college or university decision makers should be aware of the opportunity costs that accompany each possible actionPrinciple 3Rational People Think at the Margin Economists normally assume that people are rational Rational people systematically and purposely do the best they can to achieve their objectives given the opportunities they have Rational people know that decisions in life are rarely black and white but usually involve shades of gray Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action Keep in mind that margin means edge so marginal changes are adjustments around the edges of what you are doing Rational people often make decisions by comparing marginal benefits and marginal costs Marginal decision making can help explain some otherwise puzzling economic phenomena Here is a classic question Why is water so cheap while diamonds are so expensive Humans need water to survive while diamonds are unnecessary but for some reason people are willing to pay much more for a diamond than a cup of water The reason is that a persons willingness to pay for any good is based on
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