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ECN 104 (388)
Eric Kam (21)
Chapter 1

Chapter 1

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Ryerson University
ECN 104
Eric Kam

Principles of Microeconomics Chapter 1 The management of societys resources example people land buildings and machinery is important because resources are scarce Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have Economics is the study of how society manages its scarce resources In most societies resources are allocated not by a single central planner but through the combined actions of millions of households and firms Economists also study how people interact with one another They also analyze forces and trends that affect the economy as a whole including the growth in average income the fraction of the population that cannot find work and the rate at which prices are rising How People Make Decisions An economy is just a group of people interacting with one another as they go about their lives Principle1 People Face Tradeoffs To get one thing that we like we usually have to give up another thing that we like Making decisions requires trading off one goal against another When people are grouped into societies they face different kinds of tradeoffs The classic tradeoff is between guns and butter The more we spend on national defense guns to protect our shores from foreign aggressors the less we can spend on consumer goods butter to raise our standard of living at home Also important in modern society is the tradeoff between a clean environment and a high level of income Laws that require firms to reduce pollution raise the cost of producing goods and services Because of the higher costs these firms end up earning smaller profits paying lower wages charging higher prices or some combination of these three Another tradeoff society faces is between efficiency and equity Efficiency means that society is getting the most it can from its scarce resources Equity means that the benefits of those resources are distributed fairly among societys members In other words efficiency refers to the size of the economic pie and equity refers to how the pie divided In other words when the government tries to cut the economic pie into more equal slices the pie gets smaller Principle2 The Cost of Something is What You Give Up to Get it Because people face tradeoffs making decisions requires comparing the costs and benefits of alternatives courses of action
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