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Chapter 1

Chapter 1- Ten Principles of Economics.doc

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Bridget O' Shaughnessy

Chapter 1- Ten Principles of Economics January 6, 2014 8:16 AM • Economy=society faces many decisions (what jobs needs to be done and who will do them, who gets the goods and services produced) • Management of society's resources needed b/c resources are scarce (society has limited resources) • Economics= study of how society manages its scarce resources, through combined actions of many households +firms 10 Principles of Economics How People Make Decisions • People face tradeoffs (To get 1 thing we like, we have to give up something else= decision making) o Classic tradeoff: Guns and Butter (The more we spend on national defence-guns, the less we can spend on consumer goods-butter for high standard living o Firms: Reduce pollution= Incr. cost of production= lower wages= higher selling prices = decrease income o Efficiency (society getting most out of scarce resources) vs Equity (Benefits of resources divided fairly among society) • The cost of something is what you give up to get it o ***1 + 2 = Opportunity Costs (What you give up to get that item) 3. Rational people think at the margin (costs VS benefits, ignoring sunk costs-what happened in the past- only from this point forward) o Rational ppl= do the best to achieve goals o Marginal changes= small incremental adjustments to a plan of action o Why we are willing to pay more for diamond vs water: Marginal benefit of diamond larger because it is more rare (less previous consumption) 4. People respond to incentives (something that induces ppl to act-punishment or reward) o Rational ppl respond to incentives o Public policymakers change costs and benefits= alter behaviour (e.g Tax on gas= drive fuel efficient cars) How People Interact 1. Trade can (will) make everyone better off (total benefits from trade is greater than the total losses ) o Americans are Canada's competitors in world economy (produce same goods) o Competition but no one wins/loses --> both better off o Trade allows specialization (so ppl can buy variety of goods cheap) 2. Markets tend to increase efficiency (efficiency= how much we can make) o Communist economy: central planners (gov't guide economic activity, makes all decisions o VS Market economy: decisions on allocation of resources made by millions of households a
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