scarcity: the limited nature of society's resources
economics: study of how the society manage its scarce resources | because resources are allocated
through action of households and ﬁrms,economics thus study how people make decisions.
Ten Principles of Economics
How People Make Decisions
1. People Face Trade-offs
a. every action means giving something up
i. A policy to promote sth,must sacriﬁced sth
b. there is no free lunch.
c. trade-off the society faces: efﬁciency and equality
2. The Cost of Something Is What You Give Up to Get It
a. opportunity cost
b. time is money
3. Rational People Think at the Margin
economists assume all people are rational-do the best maximize their own beneﬁt
b. Economists use the term marginal change to describe a small incremental adjustment
to an existing plan of action.
i. eat that spoonful of mashed potato or not
c. Rational people often make decisions by comparing marginal beneﬁts and marginal
i. A rational decision maker takes an action if and only if the marginal beneﬁt of
the action exceeds the marginal cost.
ii. marginal beneﬁt depends on how many units a person already has.
4. People Respond to Incentives
a. An incentive is something that induces a person to act.
i. thus >> If a policy changes incentives,it will cause people to alter their
ii. incentives affect decision
b. positive incentive: reward; negative incentive: punishment
c. rational people respond to incentives by comparing cost & beneﬁts
5. Describe an important trade-off you recently faced.
a. so I have to read my econ200 text before class,I gave up a movie opportunity 6. Give an example of some action that has both a monetary and nonmonetary opportunity
a. it is cold out so john doe stayed in bed instead of going to class: monetary opportunity
cost is he missed a class which he already paid for (tuition),nonmonetary opportunity
cost is he missed the material covered in class which he might have to spend more
time to self-teach.
7. Describe an incentive your parents offered to you in an effort to inﬂuence your behavior.
a. "wash the dishes 5 days a week and I will reward you a dollar"
How People Interact
Trade Can Make Everyone Better Off
a. Trade allows each person to specialize in the activities he or she does best.By trading
with others,people can buy a greater variety of goods and services at lower cost.
i. This reminds me of Sakura.not exactly but similar."trading food".it's like person
A goes to Sakura and ordered all ﬁsh,B orders all clam,C orders all beef,D orders
all fried rice...so on so forth,then in the end we trade the food,everyone is now
able to eat just a little bit of everything.
9. Markets Are Usually a Good Way to Organize Economic Activity
a. central planned economy v.s.market economy
i. invisible hand
1. participants in the economy are motivated by self-interest and that the
“invisible hand”of the marketplace guides this self-interest into promoting
general economic well-being.
2. buyers look at the price when determining how much to demand,sellers
look at the price when deciding how much to supply.
a. market prices reﬂect both the value of a good to society and the cost
to society of making the good.
ii. Smith's great insight was that prices adjust to guide these individual buyers and
sellers to reach outcomes that,in many cases,maximize the well-being of society
as a whole.
iii. government does not always have the insight.
10. Governments Can Sometimes Improve Market Outcomes
then,why we need government?
i. market economies need institutions to enforce property rights so individuals can
own and control scarce resources.
ii. 政府介⼊入 allocation of scarce resources 的两个理由
1. promote efﬁciency
a. market failure-when market fails to allocate its resources efﬁciently
i. externality -the impact of one person's actions on the well-
being of a bystander 1. e.g.pollution
ii. market power -refers to the ability of a single person (or small
group) to unduly inﬂuence market prices.
2. promote equality
a. A market economy rewards people according to their ability to
produce things that other people are willing to pay for.
i. Inequality lies in the price-people pay differently.
11. Why is a country better off not isolating itself from all other countries?
a. No country is omnipotent,a country has its strength and weakness,by cooperating i.e.
trading with others,different countries can specialize in what they are best of.If a
country isolates itself from all others it has to do all the work-very inefﬁcient.
12. Why do we have markets,and,according to economists,what roles should government play
a. we have markets so households and ﬁrms can trade scarce resources.Government
cannot do all the job allocating resources because the "invis