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Chapter 1

Chapter 1 - Ten Principles Of Economics

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Department
Economics
Course
Economics 10a
Professor
Gregory Mankiw
Semester
Fall

Description
Chapter 1: Ten Principles of Economics Scarcity: the limited nature of society’s resources Economics: the study of how society manages its scarce resources How People Make Decisions: Principle 1: People Face Trade­offs ­ guns vs butter ­ efficiency vs equality ­ does not tell us what decisions to make but helps understand options Principle 2: The Cost of Something is What You Give Up to Get It  ­ making decisions involve comparing costs ­ opportunity cost is what you give up to obtain an item 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 comparing marginal benefits and marginal costs ­ marginal change: a small incremental adjustment to a plan of action  ­ explains how luxuries can be worth so much more than essentials and why  airlines are willing to sell ticket below average cost Principle 4: People Respond to Incentives ­ incentive: induces person to act, such as punishment or reward ­ crucial to analyzing how markets work, affects people’s decisions ­ may have unexpected consequences ex: seat belts made people drive less safely How People Interact: Principle 5: Trade Can Make Everyone Better Off ­ trade allows specialization and diversity of goods and services Principle 6: Markets Are Usually a Good Way to Organize Economic Activity ­ communist countries have central planning where the government allocates scarce  resources ­ market economy allocates resources through decentralized decisions of many  firms and households as they interact for goods and services ­ “invisible hand” proposed by Adam Smith leads to desirable market outcomes ­ prices adjust to guide individual buyers and sellers to reach outcomes to maximize  well­being of society  ­ when government/central planning prevents prices from adjusting to supply and  demand, it impedes invisible hand ex: taxes, price control ­ sel
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