Twelve Basic Principles of Economics – 8/16
1. The fundamental problem - resources are scarce
a. Unlimited wants and needs
• Society:
• Individual:
b. Four factors of production
• Land:
• Labor:
• Capital:
• Entrepreneurship:
2. The real cost of something is what you must give up
to get it
a. Opportunity cost: what you give up in
order to get the item you want
b. Ex: go to college or find a job?
3. “How Much?” is a decision at the margin
a. Examples: studying, eating
b. Compare costs and benefits
of doing a little bit more –
marginal analysis
c. The paradox of value and
marginal analysis diamonds vs. water
i. Utility:
4. People usually exploit opportunities to make
themselves better off
a. Example: Jiffy Lube in Manhattan
b. The role of incentives:
5. There are gains from trade
a. Division of labor and specialization:
6. Markets move toward equilibrium
a. Jiffy Lube in Manhattan (again): what
happens if this scenario was real?
b. Another example: Safeway lines
c. Markets are predictable
7. Resources should be used as efficiently as possible to
achieve society’s goals
a. Efficiency: Take all opportunities to make some
better off while not making anyone else worse off
b. Equity:
c. Example of conflict:
8. Markets usually lead to efficiency – the “invisible
hand”
a. Opportunities for mutual gain are usually taken
b. Examples:
9. When markets don’t achieve efficiency, govt
intervention can improve society’s welfare
a. Example:
10. One person’s spending is another person’s income
a. Chain reaction effect:
11. Overall spending sometimes gets out of line with
the economy’s productive capacity
a. Example: the Great Depression
b. Can lead to inflation:
12. Govt policies can change spending
a. Varying taxes, controlling circulation of
money, etc.