Economic Principles Chapter 1 Explain the costs-vs.-benefits principle What is the difference between a marginal benefit and marginal cost? Why do we care about incentives? What is the job of the “invisible hand” in a market?

#1 Principle of Economics Scarcity forces trade-offs. We have unlimited wants, but limited resources—causes a scarcity. When you have to choose one thing over another because of this, you make a trade-off. Called the scarcity-forces-trade-offs principle (“no free lunch principle”) Every choice involves a trade-off

#2 Scarcity-forces-tradeoffs makes us choose, using expected costs and benefits. Cost—what you spend in money, time, effort, or other sacrifices to get something. Benefit—what you gain in money, time, experience, etc. from getting something. Cost-vs-benefits principle—people choose something when the benefits are greater than the costs. Cost-benefit analysis is a tool used to calculate costs and benefits

Cost-benefit analysis practice: Sleeping in 20 extra minutes COSTS BENEFITS

#3 Weighing costs and benefits leads to thinking at the margin, adding one more/less unit from what we already have. Thinking-at-the-margin principle—most daily decisions are choices to have a little more or less of something rather than a radical change Marginal cost—what you give up to add one unit to an activity (one more cupcake, one more sit-up) Marginal benefit—what you gain by adding one more unit

Calculating marginal costs: Making cupcakes What would be the marginal cost of baking 25 cupcakes if your mix is proportioned to make only 24? MC= change in unit= 25-24= 1 total quantity 25 25

#4 Costs and benefits influence our behavior, acting as incentives, motivations to take action. Incentives matter principle—people respond to incentives in generally predictable ways Positive and negative incentives

#5 Incentives allow us to concentrate on what we do best and trade others for what they do best. Trade-makes-people-better-off principle—by focusing on what we do best and trading with others, we end up with more and better choices than if we did everything ourselves

#6 We trade in a market, any arrangement that brings buyers and sellers together. Markets-coordinate-trade principle—markets usually do better than anyone/thing else at coordinating exchanges between buyers and sellers “Invisible hand”—former theory of market coordination; markets coordinate trade with efficiency

#7 Choices and decisions have long-term effects. Future-consequences-count principle—decisions made today have consequences today and in the future Law of unintended consequences—actions of people and governments always have effects that are not expected