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Chapter 1

Chapter 1 Reading.docx

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Georgia Institute of Technology
ECON 2106

Chapter 1 Reading 8/29/2012 4:29:00 PM Intro  Economics is all about individual choice  Economic interaction: how my choices affect your choices, and vice versa 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 exhausted. 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 being self-sufficient. o Specialization: division of tasks o Econom
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