ECN – Chapter 1
Ten Principles of Economics
Scarcity: the limited nature of society’s resources
Economics: the study of how society manages its scare resources
o Economists study how people make decisions:
How much they work?
What they buy?
How much they save?
Study how people interact w/ one another
o Economists analyze forces & trends that affect economy as a whole
How People Make Decisions
Principle #1: People Face Tradeoffs
Making decisions requires trading off one goal against another
Ex. going to work for longer hours, which leaves less time for leisure
Important tradeoff society faces: efficiency vs. equity
o Efficiency: the property of society getting the most it can from scarce resources
o Equity: the property of distributing economic prosperity fairly among the
members of society
o Ex. efficiency is the size of economic pie and equity refers to how the pie is
Principle #2: The Cost of Something Is What You Give Up to Get It?
Making decisions requires comparing the costs and benefits of alternative choices
Opportunity cost: whatever must be given up to get some item Ex. seeing a movie is not just the price of the ticket, but the value of the time you spend
in the cinema
Principle #3: Rational People Think at the Margin
Rational people: people who systematically and purposefully do the best they can to
achieve their objectives
Marginal changes: small incremental adjustments to an existing plan (“margin” meaning
o Ex. at dinnertime, the decision is whether you take that extra spoonful of mashed
potatoes NOT whether to fast or eat like a pig
Principle #4: People Respond to Incentives
Incentive: something (punishment or a reward) that induces (influences) a person to act
Rational people (make decisions by comparing costs & benefits ) respond to incentives
Ex. when price of an apple rises, people decide to eat more pears and fewer apples (cost
of apples are higher)
How People Interact
Principle #5: Trade Can Make Everyone Better Off
People can specialize in producing one good/service and exchange it for other goods
Countries also benefit from trade & specialization:
o Get a better price abroad for goods they produce
o Buy other goods more cheaply from abroad than at produced at home
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity
Market: a group of buyers & sellers
“Organize economic activity” means:
o What goods to produce?
o How to product them? o How much of each to produce?
o Who gets them?
Market economy: allocates resources through decentralized decisions of many firms and
households as th