Economy: “Greek word for “one who manages a house-hold.”
Scarcity: The limited nature of society’s resources
Economics: the study of how society manages its scarce resources
Principle 1: People Face Tradeoffs
Efficiency: The property of society getting the most it can from its scarce resources
Equity: The property of distributing economic prosperity fairly among the members of society.
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
Marginal Changes: small incremental adjustments to a plan of action.
Principle 4: People Respond to Incentives
Principle 5: Trade can make everyone better off
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 intereact in markets for goods and services.
Principle 7: Governments Can Sometimes Improve Market Outcomes
Property rights: the ability of an individual to own and exercise control over scarce
Market failure: a situation in which left on its own fails to allocate resources efficiently
Externality: the impact of one person’s actions on the well-being of a bystander
Market power: the ability of a single economic actors) to have a substantial influence on
Principle 8: A Country’s Standard of Living Depends on its ability to produce goods and services.
Principle 9: Prices rises when the government prints too much money
Principle 10: Society Faces a short0run tradeoff between inflation and unemployment. - Increasing the amount of money in the economy stimulates the overall level of
spending and thus the demand for goods and services.
- Higher demand may, over time, cause firms to raise their prices, but in the meantime,
it also encourages them to increase the quantity of goods and services they produce
and to hire more workers to produce those goods and services.
-More hiring means lower unemployment
Circular-flow diagram: a visual model of the economy that shows how dollars flow through
markets among households and firms
Production possibilities frontier: a graph that shows the combinations of output that the economy can
possibly produce given the available factors of production and the available production technology
Microeconomics: The study of how households and firms make decisions and how they interact in
markets. Macroeconomics: the study of economy-wide phenomena, including inflation, unempl