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ECN 104 (388)
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ECN 104
Halis Yildiz

Economics is the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity. Ten Key Concepts The Individual  CONCEPT 1 (“Facing Trade-offs”): Scarcity in relation to wants means you face trade-offs; there-fore, you have to make choices. You have to trade one goal to another.  CONCEPT 2 (“Opportunity Costs”): The cost of the choice you make is what you give up for it, or the opportunity cost.  CONCEPT 3 (“Choosing a Little More or Less”): Choices are usually made at the margin; we choose a “little” more or a “little” less of something. People make decisions by comparing costs and benefits.  CONCEPT 4 (“The Influence of Incentives”): The choices you make are influenced by incentives. When the price of one thing rises, people stop buying that thing as much and rely on something else. Discounts and sales. Interaction among Individuals  CONCEPT 5 (“Specialization and Trade”): Specialization and trade will improve the well- being of all participants. Competition result in gains from trading and trade allows people to specialize.  CONCEPT 6 (“The Effectiveness of Markets”): Markets usually do a good job of coordinating trade among individuals, groups, and nations. Households decide what to buy and who to work for while firms decide who to hire and what to produce. Adam Smith: invisible hand = prices  CONCEPT 7 (“The Role of Governments”): Governments can occasionally improve the coordinating function of markets. When the market fails, the government can promote efficiency and equity. Failure may be caused by an externality (impact of one person or firm’s actions on the well-being of a bystander, such as a factory polluting air near a residential area) or market power (which is the ability of a single person or firm to unduly influence market prices, such as a monopoly which means higher prices and lower
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