Economics Chapter 1
Scarcity: the limited nature of society’s resources. Natural resource, land & workers time are all limited
in its availability
Economics: The study of how society manages its scarce resources
Principle #1: People face trade-offs
To get one thing, we usually have to give up something else ,“There is no such thing as a free lunch”
Firms What to produce, how much to produce, how many workers to hire, etc.
Individuals What to purchase, how much to save, how many hours to work, etc.
Efficiency: The property of society getting the most it can from its scarce resources
Equity: The property of distributing economic prosperity fairly among the members of society
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.
To become a doctor, you need to go to medical school. In addition, you are giving up other
Waiting in a long line for a free item costs your time.
Principle #3: Rational People Think at the Margin
Rational People: People who systematically and purposefully do the best they can to achieve their
Rational people make decision by comparing marginal benefits and marginal costs.
Suppose you have already eaten 3 tacos. Whether to have an extra taco depends on price of the
taco (marginal cost) and the extra satisfaction it gives (marginal benefit).
To study one more hour the night before the exam has benefits and costs (less sleep).
In economics, we usually assume that firms’ objective is to maximize its profit and consumers' objective
is to achieve the highest level of satisfaction.
Marginal Changes: Small incremental adjustments to a plan of action
Principle #4: People Responds to Incentives
Incentive: something that induces a person to act
Rational people responds to incentive 2
If price of gasoline rises, people drive less.
If a neighboring country let people visit without a visa, the number of tourists will increase.
If a famous food critic is waiting for a dinner, the chef is trying her/his best.
When government changes a rule or regulation, it gives an incentive to (some) people to change their
When the government didn’t think thoroughly about all the incentives, unintended consequences can
Seat belt law changes how people drive. As result, there were no change in the number of driver
Some say, to decrease the number of concussions in the NFL, you need to stop the use of
Principle #5: Trade can Make Everyone Bet