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01:220:102 (14)
Chapter 1


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Rutgers University
Thomas Prusa

Chapter 1- First Principles 1-1  3 levels of economic understanding o how individuals make choices o how these choices interact o how the economy functions overall  Individual choice- decision by an individual of what to do, which necessarily involves a decision of what not to do  Resource- anything that can be used to produce something else o Resources are scarce- there is not enough of the resources available to satisfy all the various ways a society wants to use them  Opportunity cost- real cost of an item; what you must give up in order to get it  Trade-off- when you compare the costs with the benefits of doing something  Marginal decisions- decisions about whether to do a bit more or a bit less of an activity o Marginal analysis- study of such decisions  Incentive- anything that offers rewards to people who change their behavior 1-2  Principles that underlie the interaction of individual choices o There are gains from trade o Markets move toward equilibrium o Resources should be used as efficiently as possible to achieve society’s goals o Markets usually lead to efficiency o When markets don’t achieve efficiency, government intervention can improve society’s welfare  Interaction
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