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Rauf Azhar

CHAPTER ONE Scarcity refers to the limited nature of societys resources Economics is the study of how society manages its scarce resources including how people decide how much to work save and spend and what to buy how firms decide how much to produce how many workers to hire how society decides how to divide its resources between national defense consumer goods protecting the environment and other needsPrinciple 1 People Face TradeOffsAll decisions involve tradeoffs Examples Going to a party the night before your midterm leaves less time for studying Having more money to buy stuff requires working longer hours which leaves less time for leisure Protecting the environment requires resources that might otherwise be used to produce consumer goodsPrinciple 2 The Cost of Something is What you Give up Making decisions requires comparing the costs and benefits of alternative choices The opportunity cost of any item is whatever must be given up to obtain it It is the relevant cost for decision makingPrinciple 3 Rational People Think at the MarginA person is rational if she systematically and purposefully does the best she can to achieve herobjectives Many decisions are not all or nothing but involve marginal changesincrementaladjustments to an existing plan Evaluating the costs and benefits of marginal changes is an important part of decision makingPrinciple 4 People Respond to Incentives incentive something that induces a person to act ie the prospect of a reward or punishment Rational people respond to incentives because they make decisions by comparing costs and benefitsExamples In response to higher gas prices sales of hybrid cars eg Toyota Prius rise In response to higher cigarette taxes teen smoking fallsPrinciple 5 Trade Can Make Everyone Better OffRather than being selfsufficient people can specialize in producing one good or serviceand exchange it for other goods Countries also benefit from tradespecialization get a better price abroad for goods they produce buy other goods more cheaply from abroad than could be produced at homePrinciple 6 Markets Organize Economic ActivityA market is a group of buyers and sellersThey need not be in a single locationOrganize economic activity means determining what goods to produce how to produce them how much of each to produce who gets them In a market economy these decisions result from the interactions of many households and firms Famous insight by Adam Smith in The Wealth of Nations 1776Each of these households and firms acts as if led by an invisible hand to promote general economicwellbeingThe invisible hand works through the price system The interaction of buyers and sellers determines prices of goods and services Each price reflects the goods value to buyers and the cost of producing the good Prices guide selfinterested households and firms to make decisions that in many cases maximize societys economic wellbeingPrinciple 7 Governments Can Sometimes Improve Well BeingImportant role for govt enforce property rights with police courts People are less inclined to work produce invest or purchase if large risk of their property beingstolen A restaurant wont serve meals if customers do not pay before they leave A music company wont produce CDs if too many people avoid paying by making illegal copies Govt may alter market outcome to promote efficiency market failure when the market fails to allocate societys resources efficiently Causes externalities when the production or consumption of a good affects bystanders eg pollution market power a single buyer or seller has substantial influence on market price eg monopoly In such cases public policy may increase efficiency Govt may alter market outcome to promote equity If the markets distribution of economic wellbeing is not desirable tax or welfare policies can change how theeconomic pie is dividedPrinciple 8 A countrys standard of livingdepends on its ability to produce goods services Huge variation in living standards across countries and over time Average income in rich countries is more than ten times average income in poor countries The US standard of living today is about eight times larger than 100 years agoThe most important determinant of living standards productivity the amount of goods and services producedper unit of labor Productivity depends on the equipment skills and technology available to workers Other factors eg labor unions competition from abroad have far less impact on living standardsPrinciple 9 Prices rise when thegovernment prints too much money Inflation increases in the general level of pricesIn the long run inflation is almost always caused by excessive growth in the quantity of money which causesthe value of money to fall The faster the govt creates money the greater the inflation ratePrinciple 10 Society faces a shortrun
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