Textbook Notes (368,107)
Canada (161,650)
Economics (1,074)
EC120 (348)
Chapter 1

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Rizwan Tahir

Chapter 1 What economics is all about Scarcity: limited resources to satisfy unlimited wants Economics: “science of choice” the study of how society manages it scarce resources (e.g.)  How people decide what to buy, how much to work, save and spend  How firms decide how much to produce, how much workers to hire  How society decides how to divide its resources b/t national defence, consumer goods, protecting the environment and other needs How people make decisions Principle 1: people face tradeoffs  giving up something for something else  All decisions involve tradeoffs (eg, going to a party the night before your midterm leaves less time for studying) Society faces an important tradeoff: efficiency vs equity Efficiency: when society gets the most from its scarce resources Equity: when prosperity is distributed uniformly Tradeoff: to achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie” Principle 2: the cost of something is what you give up to get it  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 o The relevant cost for decision making Explicit costs include:  Tuition net of scholarships and tax credits  Books  Costs of room and board in excess of that you would incur at home Implicit costs:  Lost income from working Principle 3: Rational people think at the margin Rational people  Systematically and purposefully do the best they can to achieve their objectives  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  can be a reward or punishment (good/ bad)  Rational people respond to incentives (ie. When gas prices rice, consumers buy more hybrid cars) Principle 5: trade can make everyone better off  Rather than being self-sufficient, people can specialize in producing one good/ service and exchange it for other goods  Countries also benefit from trade and specialization o Get a better price abroad for goods they produce o Buy other goods more cheaply from abroad than could be produced at home Principle 6: Markets are usually a good way to organize economic activity  Markets: a group of buyers and sellers (can’t be in a single location)  Organize
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