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ECN 104
Frank Trimnell

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 divided 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 “edge”) 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
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