Some of the topics discussed in this
chapter
What kinds of questions does economics
address?
What are the principles of how people
make decisions?
What are the principles of how people
interact?
What are the principles of how the
economy as a whole works?
CHAPTER 1
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TEN PRINCIPLES OF ECONOMICS
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Economy. . .
TEN PRINCIPLES OF ECONOMICS
. . . The word economy comes from a Greek
word for “one who manages a household.”
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A household and an economy face many decisions:
Who will work?
What goods and how many of them should be
produced?
What resources should be used in production?
At what price should the goods be sold?
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TEN PRINCIPLES OF ECONOMICS
•
Society and Scarce Resources:
• The management of society’s resources is important because
resources are scarce.
• Scarcity. . . means that society has limited resources and therefore
cannot produce all the goods and services people wish to have.
Economics is the study of how society manages its scarce resources.
• how people decide how much to work, save,
and spend, and what to buy
• how firms decide how much to produce,
how many workers to hire
• how society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other
needs
HOW PEOPLE MAKE DECISIONS
• People face trade-offs.
• The cost of something is what you give up to
get it.
• Rational people think at the margin.
• People respond to incentives.
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Principle #1: People Face Trade-offs.
Principle #1: People Face Trade-offs
• “There is no such thing as a free lunch!”
• To get one thing, we usually have to give up another thing.
• Efficiency v. Equity
•
•
•
•
Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity
All decisions involve tradeoffs. Examples:
• Going to a party the night before your midterm leaves less time
for studying.
• Having more money to buy stuff requires working longer hours,
which leaves less time for leisure.
• Protecting the environment requires resources that might
otherwise be used to produce consumer goods.
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• Efficiency means society gets the most that it can
from its scarce resources.
• Equity means the benefits of those resources are
distributed fairly among the members of society.
• Tradeoff: To increase equity, can redistribute
income from the well-off to the poor.
But this reduces the incentive to work and
produce, and shrinks the size of the economic
“pie.”
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Principle #2: The Cost of Something Is
What You Give Up to Get It.
• Decisions require comparing costs and benefits of alternatives.
• Whether to go to college or to work?
• Whether to study or go out on a date?
• Whether to go to class or sleep in?
• The opportunity cost of an item is what you give up to obtain
that item.
• Basketball star LeBron James understands opportunity costs
and incentives. He chose to skip college and go straight from
high school to the pros where he earns millions of dollars.
• The opportunity cost of…
…going to college for a year is not just the tuition, books, and fees, but also
the foregone wages.
…seeing a movie is not just the price of the ticket, but the value of the time
you spend in the theater.
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