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Chapter 1 IntroductionTen Principles of EconomicsMicroeconomics1People face tradeoffs2The cost of something is what you give up to get it3Rational people think at the margin4People respond to incentives5Trade can make everyone better off6Markets are usually a good way to organize economic activity7Governments can sometimes improve economic outcomesMacroeconomics8The standard of living depends on a countrys production9Prices rise when the government prints too much money10Society faces a shortrun tradeoff between ination and unemploymentPrinciple 1 People Face TradeoffsTo get something we usually have to give up something elseMaking decisions requires trading off one goal against anotherEfciency v EquityEfciencysociety gets the most it can from its scarce resourcesEquitythe benets of those resources are distributed fairly among the members of societyPrinciple 2 The Cost of Something is What You Give Up to Get ItDecisions require comparing costs and benets of alternativesOpportunity cost of an item is what you give up to obtain that itemPrinciple 3 Rational People Think at the MarginMarginal changessmall incremental adjustments to an existing plan of actionPeople make decisions by comparing costs and benets at the marginPrinciple 4 People Respond to IncentivesMarginal changes in costs or benets motivate people to respondThe decision to choose one alternative over another occurs when that alternatives marginal benets exceed its marginal costsPrinciple 5 Trade Can Make Everyone Better OffPeople gain from their ability to trade with one anotherCompetition results in gains from tradingTrade allows people to specialize in what they do bestPrinciple 6 Markets Are Usually a Good Way to Organize Economic ActivityMarket economy an economy that allocates resources through the decentralized decisions of many rms and households as they interact in markets for goods and servicesHouseholds decide what to buy and who to work forFirms decide who to hire and what to produceAdam Smith made the observation that households and rms interacting in markets act as if guided by an invisible handBecause households and rms look at prices when deciding what to buy and sell they unknowingly take into account the social costs of their actionsAs a result prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a wholePrinciple 7 Governments Can Sometimes Improve Market OutcomesMarket Failure occurs when the market fails to allocate resources efcientlyMay be caused by an externality which is the impact of one person or rms actions on the wellbeing of a bystander market power which is the ability of a single person or rm to unduly inuence market pricesWhen the market fails breaks down government can intervene to promote efciency and equityChapter 2 Thinking Like An EconomistEconomists as Scientists1Make positive statementsdescribe the world as it isthese statements can be conrmed or refuted2Employ the scientic method to develop and test theories about how the world worksThe Economist as Policy AdvisorMake normative statementsprescribe how the world should bethese statements cannot be conrmed or refutedGovernments employ many economist for policy adviceWhy Economists DisagreeEconomists maydisagree about the validity of alternative positive theories about the worldhave different valuesdifferent normative views about what policy should try to accomplishYet there are many propositions about which most economists agreeAssumptions ModelsAssumptionssimplify the complex world to make it easier to understandyield useful insights about the more complicated real worldEconomists use models to study economic issuesThe CircularFlow Diagram Our First ModelA visual model of the economyshows how dollars ow through markets among households and rmsIncludes two types of actors households rmsIncludes two markets goods and services factors of productionFactors of ProductionThe resources that the economy uses to produce goodsservices include1labour2land3capital4entrepreneurshipSecond Model The Production Possibilities Frontier PPFShows the combinations of two goods the economy can possibly produce given the available production factors of production and the available production technologyExampleTwo goods computers and wheatOne resource labour in hoursEconomy has 50000 labour hours per month available for productionLabour HoursLabour HoursProductionProductionComputerWheatComputerWheatA500000500040000100004001000BC2500025000250250010000400001004000D05000005000EThe PPF and Opportunity CostOpportunity Cost what must be given up to obtain somethingMoving along a PPF involves shifting resources from the production of one good to the otherSociety faces a tradeoff getting more of one good requires sacricing some of the otherThe slope of the PPF tells you the opportunity cost of one good in terms of the other
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