Textbook Notes (368,795)
Canada (162,165)
Economics (748)
ECON 1B03 (303)
Chapter 1

Chapter 1

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Usman Hannan

CHAPTER 1: TEN PRINCIPLES OF ECONOMICS - scarcity: the limited nature of a society’s resources - economics: the study of how society manages its scarce resources How People Make Decisions… Principle 1 – People Face Tradeoffs - classic trade-off is “guns and butter” (national defence budget is up, consumer goods are down) - clean environment vs. high income - efficiency (the property of society getting the most it can from its scarce resources i.e. size of economic pie) vs. equity (the property of distributing economic prosperity fairly among the members of society i.e. how the pie is divided) 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 - relevant cost for decision making - i.e. what is the cost of going to university? Not room and board, but tuition and time that could be spent working Principle 3 – Rational People Think at Margin - rational people: those who systematically and purposefully do the best they can to achieve their objectives - marginal changes: small incremental adjustments to a plan of action - margin = edge - rational people compare marginal benefits with marginal costs (benefit>cost) - i.e. plane charges 500/seat, there are seats empty, a standby passenger will pay 300 which is greater than the marginal cost (the complimentary food) therefore it is worth it > thinking at the margin - marginal benefit depends on how many units a person has (so much water that another cup isn’t that plentiful, where as diamonds are rare so their marginal benefit is considered higher) Principle 4 – People Respond to Incentives - incentive: something that induces a person to act (punishment or reward) - the effect of a good’s price on the behaviour of buyers and sellers in a market is crucial for understanding how the economy allocates scarce resources - public policy makers need to play close attention to incentives (i.e. gas tax goes up then less people drive cars and cause pollution) How People Interact… Principle 5 – Trade Can Make Everyone Better - both are better off, there is not a winner/loser - trade allows each person to specialize in the activities he/she does best Principle 6 – Markets Are Usually a Good way to Organize Economic Activity - market: group of buyers or sellers - central planners (communism) decided what goods/services to produce, how much was produced and who got the ot
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