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Chapter 1

EC120 Chapter 1 Textbook Notes

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Wilfrid Laurier University
Hideki Ariizumi

EC120-TEXTBOOKNOTES --------------------------------------------------------------------------------------------------------------------- CHAPTER 1 - TEN PRINCIPLES OF ECONOMICS Economics - the study of how society manages its scarce resources Scarcity - Limited resources - the economic problem How People Make Decisions: 1. Peoplefacetrade-offs *when people decide to do one thing, they must in return give up or trade off the next best alternative *society’s largest trade-off is efficiency vs. equity - efficiency is getting the highest value from scarce goods, equity is how benefits of resources are distributed among society 2. Thecostofsomethingiswhatyougiveuptogetit * opportunity cost - what you give up by making a decision, the amount that could've been gained by choosing the option's best alternative 3. Rationalpeoplethinkatthemargin * rational people - systematically and purposefully do the best they can to achieve objectives * decision making involves shades of grey - people don’t pick one extreme or another, but rather make marginal changes which are small incremental adjustments to a current course of action * marginal benefits of a decision must be greater than its marginal costs 4. PeopleRespondtoIncentives * incentive - something that induces someone to act whether it be a reward or punishment ex. change in prices, change in policies How People Interact: 1. Tradecanmakeeveryonebetteroff Trade allows each individual specialize - more efficiency means higher value of goods at a lower price 2. Marketsareusuallyagoodwaytoorganizeeconomicactivity Market economy - does not use central planners, millions of firms and households d
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