ECON102 Chapter Notes - Chapter 1: Market Failure, Externality, Invisible Hand
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ECON 102 – Textbook Notes – Chapter 1
Ten Principles of Economics
Economics is all about scarcity, the limited nature of society's resources and the inability to
satisfy all our needs and wants.
Principle #1 - People Face Tradeoffs
Going to a party the night before your midterm leaves less time for studying.
Society faces a tradeoff: Efficiency vs. Equity
Efficiency: when society gets the most from it's scarce resources.
Equity: when prosperity is distributed uniformly among society's members.
Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor, but
this reduces incentive to work and produce, shrink the size of the economic 'pie'.
Principle #2 - The Cost of Something Is What You Give Up to Get It
Making decisions requires comparing costs and benefits of alternative choices.
The opportunity cost of any item is whatever must be given up to get it.
It is the relevant cost for decision making.
Principle #3 - Rational People Think at the Margin
o Systematically and purposefully do the best they can to achieve their objectives.
o Make decisions by evaluating costs and benefits of marginal changes--incremental
adjustments to an existing plan.
Principle #4 - People Respond to Incentives
Incentive - something that induces a person to act, i.e. the prospect of a reward or
Rational people respond to incentives:
o When gas prices rise, consumers buy more fuel efficient cars and less gas-guzzling
Principle #5 - Trade Can Make Everyone Better Off
Rather than be self-sufficient, people can specialize in producing one good or service and
exchange it for other goods.
Countries also benefit from trade and specialization:
o Get a better selling price abroad for goods they produce.
o Buy other goods more cheaply from abroad than could be produced at home.