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Chapter 1: Ten Principles of Economics

Chapter 1: Ten Principles of Economics. What is Economics?. Study of how society manages its scarce resources Therefore, basic economic concept is Scarcity. Brainstorm. What are 5 things that you would like more of?. Principle #1 People Face Trade-offs.

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Chapter 1: Ten Principles of Economics

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  1. Chapter 1:Ten Principles of Economics

  2. What is Economics? • Study of how society manages its scarce resources • Therefore, basic economic concept is Scarcity

  3. Brainstorm • What are 5 things that you would like more of?

  4. Principle #1People Face Trade-offs • TINSTAAFL: There Is No Such Thing As A Free Lunch • What in life is truly free? • Making decisions requires trading one goal for another • Efficiency vs. Equity: Maximum benefits to society vs. “fairness”

  5. Principle #2The Cost of Something is What You Give Up to Get It • Making decisions causes people to consider the costs & benefits of an action • Opportunity Cost: Whatever must be given up in order to obtain some item • Do you go to college?

  6. Principle #3Rational People Think at the Margin • Are people rational? • HUGE CONCEPT: Marginal Benefit vs. Marginal Cost • Example: Diamonds vs. Water Airlines

  7. Principle #4People Respond to Incentives • Incentives change people’s behavior • Must look at direct & indirect effects of incentives/policies Ex: Incentive effects of Gas Prices Rising

  8. Is Trade Good for the U.S.? • Should the U.S. trade more or less than we do? Why?

  9. Principle #5Trade Can Make Everyone Better Off • Trade doesn’t have to result in winners & losers – both can win! • Trade allows for specialization in what you do best

  10. Principle #6Markets Are Usually a Good Way to Organize Economic Activity • Many countries have abandoned centrally planned economies to develop markets • Market economy: an economy that allocates resources through decisions of many firms and households • Invisible Hand guides the economy when everyone does what is best for them

  11. Good Gov’t, Bad Gov’t • How much/how little should the government get involved in the economy? • In what situations does it help to have gov’t intervention?

  12. Principle #7Governments Can Sometimes Improve Market Outcomes • 2 Biggest Reasons for Intervention: Efficiency & Equality • Most useful when there is Market Failure Ex.: Externalities & Market Power • This concept produces big disagreements

  13. Principle #8A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services • Huge differences in living standards around the world • Explained by differences in productivity • Broken window fallacy?

  14. Principle #9Prices Rise When the Government Prints Too Much Money • Inflation – increase in overall level of prices in the economy • Examples?

  15. Principle #10Society Faces a Short-Run Trade-off Between Inflation & Unemployment • In short run, increase in $ leads to lower unemployment but higher prices • Trade-off leads to discussions of business cycles, fiscal & monetary policy

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