CHAPTER 1 First Principles

What you will learn in this chapter: How individuals make choices: Scarcity Opportunity cost Trade-offs Marginal analysis How individual choices interact: Trade Gains from trade Specialization Equilibrium Efficiency and equity

How Individuals Make Choices: Basic principles behind the individual choices: 1. Resources are scarce. 2. The real cost of something is what you must give up to get it Opportunity cost It is all about what you have to forgo to obtain your choice.

How Individuals Make Choices: 3. “How much?” is a decision at the margin. Trade-offs Marginal decisions and marginal analysis 4. People usually take advantage of opportunities to make themselves better off. Incentives

Interaction: How Economies Work Principles behind the interaction of individual choices: 1. There are gains from trade. Specialization Trade and gains from trade 2. Markets move toward equilibrium. 3. Resources should be used as efficiently as possible to achieve society’s goals. Efficiency Equity

Interaction: How Economies Work 4. Markets usually lead to efficiency.  Exceptions: Market failure 5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.

coming attraction: Chapter 2: Economic Models: The End of Chapter 1 coming attraction: Chapter 2: Economic Models: Trade-offs and Trade