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Chapter 1

Chapter 1- Ten Principles of Economics.docx

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Ryerson University
ECN 104
Paul Missios

TEN PRINCIPLES OF ECONOMICS Scarcity- the limited nature of society’s resources Economics- the study of how society manages its scarce resources Economists study: -people’s decision making -work hours -spending habits -money saving (amount, how they invest their savings) -interaction between people -forces and trends that affect the whole economy (e.g. unemployment rates, inflation, etc) HOW PEOPLE MAKE DECISIONS PRINCIPLE #1: PEOPLE FACE TRADEOFF -We must give up something we like in order to get one thing we like; trading off one goal against another Ex. A student allocating time for either studying for one subject than the other, or instead napping, watching TV, working etc. Other examples: clean environment and high level of income, efficiency and equity Efficiency: the society is getting the most it can from its scarce resources Equity: the benefits of those resources are distributed fairly among society’s members Essentially, efficiency refers to size of the economic pie vs. equity refers to how the pie is divided -ex. When the government redistributes income from the rich to the poor, it reduces the reward for working hard; thus, people work less and produce fewer goods and services -there must be an understanding of alternatives; not just tradeoffs alone PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT -decision- making requires comparing the costs and benefits of alternative courses of action -cost of action not always clear Ex. Going to college/university gives up your time doing other things such as working Opportunity cost: whatever must be given up to obtain some item PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN -economists normally assume that people are rational Rational people: people who systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have Rational people know/make decisions: -in life are rarely black and white, but usually involves shades of gray; no extremities Marginal changes: small incremental adjustments to an existing plan of action -margin=edge (adjustments around the edges) -comparing marginal benefits and marginal costs -the person’s willingness to pay for any good is based on the marginal benefit that an extra unit of the good will yield Ex. plentiful water needed for survival vs. rare diamonds unnecessary for survival -takes an action if and only if the marginal benefit of the action exceeds the marginal cost PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES Incentive: something that induces a person to act -rational people respond to incentives -there is a change in behaviour when policy changes incentives -public policymakers should never forget about incentive b/c many policies change the costs or benefits that people face and, therefore, alter behaviour -ignoring incentives yields unwanted results for policymakers HOW PEOPLE INTERACT PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF -Trade allows countries to specialize in what they do best -By trading, there is variety of products and lower costs -Competitors=partners in the world economy PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY -Communist countries held that central planners in the government was the most ideal system to run its economy -Only government has ultimate power and thus promote well-being -Market economies b
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