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Chapter 1

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University of Ottawa

ECO1102Introduction to MacroeconomicsChapter 1Economy Greek word for one who manages a householdHouseholds and economies face many decisions such asaWho will workbWhat goods should the firms produce and at what quantitycWhat resources should be used in the production of the goodsdAt what price should the goods be soldEconomics is the study of how society manages its scarce resources It is important because society only has a limited amount of resources Hence society cannot produce all the goods and services people wish to haveSummary of the 10 Principles of Economics1When people make decisions they face tradeoffs among alternative goals2The cost of something is what you give up to get it opportunity cost3Rational people make decisions by comparing marginal costs and benefits4People change their behavior in response to incentives5Trade can make everyone better off6Markets are usually a good way of coordinating trade between people 7Governments can sometimes improve economic outcomes should there be a market failure or if the market outcome is inequitable8The standard of living depends on a countrys production9Prices rise when the government prints too much money Hence money growth is the ultimate source of inflation10Society faces a shortrun tradeoff between inflation and unemploymentThe last 3 affect the economy as a wholePrinciple 1 People face tradeoffsTo get something we usually have to give up something else Making decisions requires trading off one goal for anotherExample The government can either be efficient or equal in terms of how they utilize the scarce resources In efficiency the government uses the resources to the best of its ability
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