Scarcity: the limited nature of society’s resources.
Economics: the study of how society manages scarce resources.
Principle 1: People Face Tradeoff’s
“no such thing as a free lunch”
Give up something to get another
Guns and butter, efficiency and equality
Efficiency: property of society getting the most it can from its scarce resources (size
Equality: property of distributing economic prosperity uniformly among the
members of society (how pie divided)
Principle 2: The cost of Something is What you Give up to Get it
Opportunity cost: whatever must be given up to obtain some item.
Principle 3: Rational People Think at the Margin
Rational people: people who systematically and purposefully do the best they can to
achieve their objectives.
Marginal change: a small incremental adjustment to a plan of action.
Rational people make decisions by comparing marginal benefits and change.
When things are plentiful the marginal benefit is low.
Principle 4: People Respond to Incentives
Incentive: something that induces a person to act
Increase price tells sellers to produce more and buyers to buy less.
Taxes- gas taxes incentive to drive small cars.
Principle 5: Trade Can Make Everyone Better Off
Trade allows us to specialize in what we do best and buy a greater variety of goods and
service at a lower price.
Principle 6: Markets are Usually a Good Way to Organize EconomicActivity
Market economies: an economy that allocates resources through the decentralized
decisions of many forms and households