10 Principles of Economics

10 Principles of Economics

Who is this? What was he trying to do? Why?

Scarcity – the limited nature of society’s resources Economics – the study of society manages its scarce resources

Principle 1: People Face Trade-Offs TANSTAAFL Some classic trade-offs in the world of economics Savings vs. Consumption Guns vs. Butter Efficiency vs. Equity

Principle 2: The Cost of Something is What You Give Up to Get It Opportunity cost – highest valued foregone alternative What is the opportunity cost of coming into class today?

Principle 3: Rational People Think at the Margin What do we mean by “margin“? margin / marginal = the change from doing one more thing Many times people use the marginal benefit and marginal cost to come to a decision. CPCC offered 44 ECO sections this semester. Why? How does the marginal benefit and cost play a role?

Principle 4: People Respond to Incentives What examples of an incentive do you face in every day life? What incentive does the government usually use?

Principle 5: Trade Can Make Everyone Better-Off When people / countries trade, it isn’t “one side loses and the other wins” It’s often “both sides win”

Principle 6: Markets are Usually a Good Way to Organize Activity Market Based Economies vs Centrally Planned Economies North vs. South Korea Markets usually do a better job of allocating society's resources efficiently.

Principle 7: Governments Can Sometimes Improve Market Outcomes Markets are known to fail – thus a market failure. Standard “market failures” Market Power Externalities In the presence of market failures, the government might be able to improve the market outcome (this is not guaranteed). Appropriate policies must be used.

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services Productivity – the quantity of goods and services produced from each unit of labor input Income = Production

Principle 9: Prices Rise When the Government Prints Too Much Money How much is this worth? About 40 cents

Principle 9: Prices Rise When the Government Prints Too Much Money Printing too much money causes inflation. Inflation – an increase in the overall level of prices This results in the value of the currency falling

Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment