Chapter 1: Ten Principle of Economics
Principle # 5 – Trade Can Make Everyone Better Off (pg. 10)
Trade between two countries can make each country better off.
Often people compete against one another to buy the best.
o Two people competing against who will buy that car first. All the specs
and great and the price is reasonable
In an economic perspective, each family is competing against other families.
If families isolate themselves from the competition of other families, that means
they have to grow their own food, make their own clothes and build their own
Trade allows people to specialize in the activities he or she does best, whether is
farming, sewing or home building.
o Trading with others, people can buy a great variety of goods and services
at a lower cost
Principle # 6–Market Are Usually a Good Way to Organize Economic
The collapse of communism in Soviet Union and Eastern Europe in the 1980’s
may be the most important change in the world
Only the government could organize economic activity
o Promoted economic well-being for the country as a whole
o The central power of everything. They make economic decisions for
millions of households and firms. Ex. Government. The government
makes all the big decisions. They decide how much the products are going
to cost and how much taxes we have to pay.
o Firms decide whom to hire. Firms consist of any businesses in general,
and are primarily PRODUCERS (Ex. My dads restaurant)
o Households (aka. Core/center) decide which firms to work for and what to
buy for their income. Mainly CONSUMERS. It is you as a individual, you
decide whom/where you want to work and what you want to purchase
with your own income.
o Market Economy (Government) > Firms (Businesses) > Households
Households and firms interacting with markets act as if they are guided by a
Market economies have been successful in arranging economic activity in way
that promotes overall economic well-being.
Chapter 1: Ten Principles of Economics 1 Market prices reflect both the value of a good to society and the cost to society for
making that good.
o When the government prevents prices from adjusting to supply and
demand, it prevents the “invisible hand’s” ability to direct the millions of
household and firms that make up the economy
Principle # 7- Government Can Sometimes Improve Market Outcome
We need the government to enforce the rules and maintains the institutions that
are key to a market economy
o Markets only work if PROPERTY RIGHTS are enforced
o The ability of an individual to own and exercise control over scarce
Ex. A restaurant won’t serve food unless they know their customers
Two reasons why government intervene in the economy
o To promote efficiency
o To promote equity
o A situation in which the market on its own fails to produce an efficient
distribution of resources
Possible cause for the market to fall is an EXTERNALITY and
o Is the impact of one person’s action in the well being of a bystander
o The ability of a single person (or small group of people) to greatly
influence market prices
Public policies can enhance economic efficiency
The market rewards producers based on the demands of people and the
willingness to pay for those demands
o Ex. A professional basketball player will earn more many than a
professional chess player simply because more people are willing to pay
more to watch a basketball game
The last three principles concerns the workings of the economy as a whole
Chapter 1: Ten Principl