chap01 ten principles

7/21/2019 Chap01 Ten Principles

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Ten Principles of

Economics

Chapter 1

Copyright 2001 by Harcourt, Inc.

All rights reserved. Requests for permission to make copies of any part of

the

work should be mailed to:Permissions Department, arcourt !ollege Publishers,


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arcourt, +nc. items and derived items copyright #-- by arcourt, +nc.

Economy. . .

. . . The word economycomes from a

Gree word for !one who manages ahouseho"d.#


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A household and an economy

face many decisions:$ho wi"" wor%

$hat goods and how many of them

shou"d be produced%

$hat resources shou"d be used in

production%&t what price shou"d the goods be

so"d%


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Society and Scarce Resources:

The management of society'sresources is important because

resources are scarce.


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Scarcity . . .

. . . means that society has "imited

resources and therefore cannot

produce a"" the goods and ser(ices

peop"e wish to ha(e.


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Economics

)conomicsis the study of how

society manages its scarceresources.


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Economists study. . .

How people make decisions.

How people interact with each other.

The forces and trends that affect theeconomy as a whole.


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Ten Principles of Economics

1. People face tradeoffs.2. The cost of something is what you give

up to get it.

3. Rational people think at the margin.4. People respond to incentives.

How *eop"e +ae ecisions


9/44arcourt, +nc. items and derived items copyright #-- by arcourt, +nc.


5. Trade can make everyone etter off.!. "arkets are usually a good way to

organi#e economic activity.

$. %overnments can sometimes improveeconomic outcomes.

How *eop"e Interact




&. The standard of living depends on a

country's production.

(. Prices rise when the government prints

too much money.

1). *ociety faces a short+run tradeoff

etween inflation and unemployment.

How the )conomy as a $ho"e $ors



1. People face tradeoffs.

!There is no such thingas a free "unch-#



1. People face tradeoffs.

To get one thing, we usua""y

ha(e to gi(e up another thing.

Guns v. butter

ood v. clothin!

"eisure time v. #or$

Efficiency v. e%uity

+aing decisions reuires trading

off one goa" against another.


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&. The cost of somethin! is

#hat you !ive up to !et it.

ecisions reuire comparing costs and

benefits of a"ternati(es. $hether to go to co""ege or to wor%

$hether to study or go out on a date%

$hether to go to c"ass or s"eep in%



&. The cost of somethin! is

#hat you !ive up to !et it.

The opportunity costof anitem iswhat you gi(e up to

obtain that item.



'. Rational people thin$ at the

mar!in.+argina" changesaresma"", incrementa"

ad/ustments to an eisting p"an of action.

*eop"e mae decisions by comparing

costs and benefits at the margin.



(. People respond to incentives.

+argina" changes in costs or benefits

moti(ate peop"e to respond.

The decision to choose one a"ternati(e

o(er another occurs when that

a"ternati(e's margina" benefits exceedits

margina" costs-



If someone offers you a /ob as manager you

might choose to sip co""ege and go straightto wor.

or

If the price of Coca Co"a increases you mightdecide to drin *epsi Co"a.

(. People respond to incentives.



). Trade can ma$e everyone

better off.*eop"e gain from their abi"ity to

trade with one another.

Competition resu"ts in gains from

trading.

Trade a""ows peop"e to specia"ie inwhat they do best.



*. +ar$ets are usually a !ood

#ay to or!ani,e economicactivity.

In a maret economy,househo"dsdecide what to buy and who to wor

for.

3irms decide who to hire and whatto produce.




#ay to or!ani,e economic

activity.

&dam 4mith made theobser(ation that househo"ds

and firms interacting in

marets act as if guided by an!in(isib"e hand.#




#ay to or!ani,e economic

activity.

/ecause households and firms look at prices

when deciding what to buy and sell, theyunknowingly take into account the social

costs of their actions.

As a result, prices guide decision makers toreach outcomes that tend to ma0imi1e the

welfare of society as a whole.



-. Governments can

sometimes improve mar$etoutcomes.

$hen the maret fai"s 5breasdown6 go(ernment can inter(ene to

promote efficiencyand euity.



-. Governments can

sometimes improve mar$et

outcomes.

+aret fai"ureoccurs whenthe maret fai"s to a""ocate

resources efficient"y.



-. Governments can


outcomes.

+aret fai"ure may be caused by aneterna"ity,which is the impact of

one person or firm's actions on the

we""7being of a bystander.



-. Governments can


outcomes.

+aret fai"ure may a"so be caused bymaret power,whichis the abi"ity of

a sing"e person or firm to undu"y

inf"uence maret prices.



. The standard of livin!

depends on a country/s

production.

4tandard of "i(ingmay be measured indifferent ways

8y comparing persona" incomes.

8y comparing the tota" maret (a"ue of anation's production.


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depends on a country/sproduction.

&"most a"" (ariations in "i(ingstandards are ep"ained by

differences in countries'

producti(ities.


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depends on a country/sproduction.

*roducti(ityis the amount of goods

and ser(ices produced from each

hour of a worer's time.

Higher productivity Higher standard of living


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0. Prices rise #hen the

!overnment prints too much

money.

Inf"ationis an increase in the o(era""

"e(e" of prices in the economy. 9ne cause of inf"ation is the growth in the

uantity of money.

$hen the go(ernment creates "arge uantitiesof money, the (a"ue of the money fa""s.


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1. Society faces a short2run

tradeoff bet#een inflation and

unemployment.

The *hi""ips Cur(ei""ustrates the tradeoffbetween inf"ation and unemp"oyment

3nflation

4nemployment

3t/s a short2run tradeoff5


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Summary

$hen indi(idua"s mae decisions,

they face tradeoffs.

:ationa" peop"e mae decisions by

comparing margina" costs and

margina" benefits.


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Summary

*eop"e can benefit by trading with

each other.

+arets are usua""y a good way of

coordinating trades.

Go(ernment can potentia""y impro(emaret outcomes.


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Summary

& country's producti(ity determines

its "i(ing standards.

4ociety faces a short7run tradeoff

between inf"ation and

unemp"oyment.


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Revie# 6uestion:

$hat are the opportunity cost of seeing a mo(ie%

If you are thinking of going to the movie insteadof working at your part-time job, the cost

includes its monetary and time costs, plus theopportunity cost of the wages you're giving upby not working.

If the choice is between movie and going to the

library to study, then the cost of seeing themovie is its monetary and time costs plus thecost to you of getting a lower grade in yourcourse.


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+ultiple Choice:

The word economy comes from theGreek word for

a)environment.b)one who participates in a market.

c)one who manages a household.

d)conservation.


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+ultiple Choice:

Economics is defined as

a)the study of business.

b)the study of how society manages itsscarce resources.

c)the study of central planning.

d)the study of government regulation.


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+ultiple Choice:

Which of the following is NOT amajor area of study for economists?

a)how people make decisionsb)how people interact with each other

c)how forces and trends affect the overall

economyd)how countries choose national leaders


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+ultiple Choice:

When society requires that firmsreduce pollution,a)there is no tradeoff, since everyone benefits

from reduced pollution.b)there is no tradeoff for society as a whole, sincethe cost of reducing pollution falls only on thefirms affected by the requirements.

c) there is a tradeoff only if some firms are forcedto close.

d)there is a tradeoff because of reduced incomesto the firms owners, workers, and customers.


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+ultiple Choice:

In economics, the cost of somethingis

a)the out-of-pocket expense of obtainingit.

b)what you give up to get it.

c)always measured in units of time.d)always higher than people think.


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+ultiple Choice:

For most students, the largest singlecost of a college education is

a)transportation, parking, andentertainment.

b)tuition, fees, and books.

c)room and board.d)the wages given up to attend school.


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+ultiple Choice: Carolyn decides to spend an additional hour

working overtime rather than watching a videowith her friends. She earns $8 for her hourswork. Her opportunity cost of working is

a)the $8 she earns.b)the enjoyment she would have received had she

watched the video.

c) the $8 minus the enjoyment she would have

received from watching the video.d)nothing, since she would have received less than$8 of enjoyment from the video.


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+ultiple Choice:

A marginal change is

a)a long-term trend.

b)a large, significant adjustment.c)a change for the worse.

d)a small incremental adjustment.


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+ultiple Choice:

Which is the most accurate statementabout trade?a)Trade makes some nations better off and others

worse off.b)Trade can make every nation better off.

c) Trading for a good can make a nation better offonly if the nation cannot produce that good.

d)Trade helps rich nations and hurts poornations.

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