TRADE-OFFPrinciple #1: People Face Tradeoffs

OPPORTUNITY COST

Increasing Opportunity Cost

Constant Opportunity Cost

I have 5 computers. For 1 more computer , I need to give up 1 burger

I have 9 computers. For 1 more computer , I need to give up 3 burgers

Principle #2: The Cost of Something is What You Give Up to Get it

P10,000+ P30,000

repairs & upgrades

P35,000

VS

P35,000

Principle #3: Rational People Think at the Margin

The more incentive (through a point card) a store give its buyers, the more buyers are likely to

purchase goods to that store because people respond to the incentives they receive.

Principle #4: People Respond to Incentives

Specialization in the activities Family 1

Family 2 Family 3

• Specialize in farming and sewing

• Will get cooking products for cheaper price

• Specialize in home building, cooking, and farming

• Will get sewing products for cheaper price

• Specialize in cooking and sewing

• Will get farming products for cheaper price

Variety of goods or services

Competition Cheaper Prices

TRADE

• Sewing, farming cooking, and homebuilding products/services available in market

• Competition between families

Principle #5: Trade can Make Everyone Better Off

In Soviet Union, China, etc...

It COLLAPSED!!!

• Today, once centrally-planning countries are developing a market economy...

It WORKS!!!

China today...

Principle #6: Markets are Usually a Good Way to Organize Economic Activity

Consumers Producers

Government

Regulations Deregulations

INEQUALITY

INEF

FICIEN

CY

Market FailureInflation

Principle #7: Governments can Sometimes Improve Market Outcomes

2012 20130

50

100

150

200bags producedpesos earnedave income

2012 20130

50

100

150

200 ave incomestandard of living

Principle #8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services

As the government prints more money to give the people cash…

..more money circulates in the economy,

Making the prices of goods (e.g. bread) increase to accommodate the big amount of cash circulating.

Principle #9: Prices Rise when the Government Prints too much Money

Inflation

OR

Unemployment

Principle #10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment