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ECON 1B03 (302)
Chapter 1

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McMaster University
Hannah Holmes

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 homes.  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 Activity (pg.10)  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  Market economy 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 (You)  Households and firms interacting with markets act as if they are guided by a “invisible hand”  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 (pg.12)  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  Property Rights o The ability of an individual to own and exercise control over scarce resources  Ex. A restaurant won’t serve food unless they know their customers would pay  Two reasons why government intervene in the economy o To promote efficiency o To promote equity  Market failure 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 MARKET POWER  Externality o Is the impact of one person’s action in the well being of a bystander  Ex. Pollution  Market Power 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
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