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Chapter 1-2

Chapter 1-2 The Principles of Economics.docx

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James Pesando

ECO100-Pesando-textbooknotes created by Lavender Yang Chapter 1 The Principles of Economics - Households allocate its scarce resources among its various members; Society allocate people/lands/machines to various jobs - Scarcity: limited nature of society’s resource - Economics: the study of how society manages its scarce resources / rational people make decisions #1. People Face Tradeoffs - e.g. “Guns and Butter”: more national defense, less consumer goods - e.g. clean environment vs. higher level of income - e.g. Efficiency vs. Equity (equal slices of pie becomes smaller) #2. The cost of something is what you give up to get it - Opportunity Cost: whatever must be given up to obtain some item #3. Rational People think at the Margin - Rational people: who systematically / purposefully do the best to achieve objectives - Marginal changes: small incremental adjustments to a plan of action  Marginal cost (P > MC means profit) vs. marginal benefit (water vs. diamond)  Rational decision: marginal benefit > marginal cost #4. People Respond to Incentives - Incentive: something than induces a person to act (e.g. punishment/awards) - E.g. price of apple rises: people buy more pears; more apple workers - Incentives cause people to alter their behavior #5. Trade Can Make Everyone Better Off - Trade allows individual to specialize in the activities he does best, by trading with others, people can buy a greater variety of foods and services at lower prices #6. Markets are usually a Good Way to Organize Economic Activity - Market Economy: allocates resources through decentralized decision of many firms/households as they interact in markets for goods/services - Market prices:  instrument that the invisible hand directs economic activity  reflect both the value of goods to society and the cost to society of ma
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