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.