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ECO100Y1 (80)

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Gustavo Indart

Principles of MicroeconomicsChapter 1Ten Principles of Economicsy Economics is the study of how society manages its scarce resources In most societies resources are allocated not by a single central planner but through the combined actions of millions of households and firmsy Economists study how people make decisions how much they work what they buy how much they save and how they invest their savings They also study how people interact with one another Economists analyze forces and trends that affect the economy as a whole including the growth in average income the fraction of the population that cannot find work and the rate at which prices are risingy Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have y Resources are characterized for being scarce and human wants for being unlimited y There are 3 main types of resources natural land minerals water etc human physical and mental and capital resources tools machinery buildings etcPrinciple 1 People Face Tradeoffs y There is no such thing as a free lunch y To get one thing that we like we usually have to give up another thing that we like Making decisions requires trading of one goal against another y Consider a student who must decide how to allocate her most valuable resourceher time She can spend all of her time studying economics she can spend all of her time studying psychology or she can divide her time between the two fields For every hour she studies one subject she gives up an hour she could have used studying the other And for every hour she spends studying she gives up an hour that she could have spent napping bike riding watching TV or working at her parttime job for some extra spending moneyy When people are grouped into societies they face different kinds of tradeoffs The classic tradeoff is between guns and butter The more we spend on national defense guns to protect our shores from foreign aggressors the less we can spend on consumer goods butter to raise our standard of living at homey Also important in modern society is the tradeoff between a clean environment and a high level of income Laws that require firms to reduce pollution raise the cost of producing goods and services Because of the higher costs these firms end up earning smaller profits paying lower wages charging higher prices or some combination of the three Thus while the pollution regulations give us the benefit of a cleaner environment and the improved health that comes with it they have the cost of reducing the incomes of the firms owners workers and customersy Another tradeoff society faces is between efficiency and equity Efficiency means that society is getting the most it can from its scarce resources Equity means that the benefits of those resources are distributed fairly among societys members In other words efficiency refers to the size of the economic pie and equity refers to how the pie is divided These two goals usually conflict 1
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