What is Economics? Economics is the study of how society manages its scarce resources. Economists focus their investigation on three main areas: Economists study how people make decision Economists study how people interact with one another Economists analyze forces and trends that effect the population.

The Economic Way of Thinking Everything has a cost. Because all resources are scarce, when we choose to use them for a particular purpose it precludes their alternative usage.

The Cost of Something is What You Have to Give up to Get it. Economists call this the Opportunity Cost of a decision. Measuring opportunity costs against the benefits of a particular decision help us to maximize the utility that can be gained from a particular set of resources.

People are Rational Economists normally assume that people are rational. That means they systematically and purposefully make decisions that will achieve their objectives, given their available opportunities. All people seek to maximize their utility.

Incentives Matter An incentive is something that induces a person to act. Because rational people seek to maximize their benefits while minimizing their costs, they respond to incentives. Changing the incentives people face changes their behavior.

Rational People Think at the Margins Most decisions involve compromise, rarely are two choices mutually exclusive. When we make incremental adjustments to an existing plan, these are called marginal changes. Ex. A rational person does not decide between studying all day or not at all, but chooses between 1 hour or 2 depending on the opportunity cost.

People Create Economic Systems to Influence Choices and Incentives Governments create public policy to encourage behaviors that society deems favorable, and discourage those deemed detrimental. Ex: The government recently rewarded people who replaced gas guzzling cars with more fuel efficient models by issuing rebates. Likewise, people who have expired inspection stickers receive fines.

People Gain from Voluntary Trade Trade allows people and nations to specialize in what they do best. Specialization allows for maximum efficiency. Efficiency is defined as producing the largest number of goods and services possible given the available resources.

Markets Usually Work A market is a group of buyers and sellers of a particular good or service. A market economy is one that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. It is virtually impossible for any government to coordinate the data necessary to maximize the utility of each citizen. Centrally planned economies fail.

Economic Actions Create Secondary Effects An externality is the impact of one person’s actions on the well-being of another. Ex: It might be profitable for a factory to pollute the surrounding countryside, but this creates costs the society will have to pay (pollution clean up, poor health, loss of outdoor activities, etc.) Market Failure is a situation in which a market left on its own fails to allocate resources efficiently.

Governments can Sometimes Improve Markets Government plays four key roles in the operation of efficient markets. Provide Information Regulation Provide Public Goods Provide a Safety Net

Productivity = Wealth Productivity refers to the quantity of goods and services produced from each unit of labor input. In nations where workers produce large quantities of goods and services per unit of time, the standard of living is high. Increases in productivity can come through: technological advancement educational improvement trade infrastucture procurement advances in the health of your workforce