Chapter 1 Reading 8/29/2012 4:29:00 PM
Economics is all about individual choice
Economic interaction: how my choices affect your choices, and vice
Principles of Individual Choice
Principle #1: Choices are necessary because resources are scarce
o People must make choices because resources are scarce.
o Time, money, land, labor, human capital, any other resource
(anything that can be used to produce something else)
o A resource is scarce when there’s not enough of the resource
available to satisfy all the ways a society wants to use it.
o Sum of individual choices is the choice of society as a whole.
Principle #2: The true cost of something is its opportunity cost
o The opportunity cost (what you must give up in order to get
an item you want) is its true cost.
o All costs are opportunity costs
o Not always monetary
Principle #3: “How Much” is a Decision at the Margin
o “How much” decisions require making trade offs at the
margin: comparing the costs and benefits of doing a little bit
more of an activity versus doing a little bit less.
o Trade-off: a comparison of costs and benefits
o Marginal decisions: decisions about whether to do a bit more
or a bit less of an activity
o Marginal analysis: study of marginal decisions.
Key to “how much” of an activity to do
Principle #4: People usually respond to incentives, exploiting
opportunities to make themselves better off.
o Incentive: an opportunity to make themselves better off.
o Individuals will exploit opportunities until they have been fully
Principles of the Interaction of Individual Choices
Principle #5: There are gains from trade
o Key to a better standard of living is trade o Gains from trade: by dividing tasks and trading, two people
can each get more of what hey want than they could get by
o Specialization: division of tasks