Chapter 1 Economics 110
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This 3 page Study Guide was uploaded by Fiona Coupe on Friday January 23, 2015. The Study Guide belongs to Economics 110 at University of Alabama - Tuscaloosa taught by Harold Elder in Winter2015. Since its upload, it has received 276 views.
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Date Created: 01/23/15
Chapter 1 Ten Principles of Economics Society must nd a way to decide what will be done and who will be doing it 0 Must allocate people goods and services Management of resources is important because resources are scarce o Scarcity limited resources so society cannot produce all the goods and services people wish to have Economics study of how society manages its scarce resources 11 HOW PEOPLE MAKE DECISIONS Economy is just a group of people dealing with one another as they go about their lives 11a Principle 1Pe0ple Face TradeOffs To get something we usually have to give up something Guns vs butter more a country spends on defense less it can afford to spend on consumer goods Another common trade off is efficiency and equality o Ef ciency society is getting the max bene t from scarce resources 0 Equality bene ts are distributed uniformly among society s members Efficiency refers to size of economy equality to how it is divided When the government tries to increase equality the value of efficiency goes down More taxes on the rich creates less incentive to work 11b Principle 2 The Cost of Something is what you give up to get it Opportunity Costwhat you give up to get it 11c Principle 3 Rational People think at the Margin Rational people systematically and purposefully do the best they can to achieve their objectives given the options Economists normally assume people are rational Marginal change small incremental adjustments to an existing plan of action 0 Marginal means 39edge so marginal changes are around the edges of what you are doing Rational people often make decisions by comparing marginal bene ts and marginal costs Rational decision makers takes an action if and only if the marginal bene t of the action exceeds the marginal cost 11d Principle 4 Pe0ple Re5pond to Incentives lncentive something that induces a person to act Higher market price incentivize people to consume less and companies to produce more 0 Many policies change and the cost or bene t that people face therefore so does behavior 12 HOW PEOPLE INTERACT Many decisions not only effect ourselves but others as well 12a Principle 5 Trade can make Everyone Better Off 0 American and Chinese compete for the same consumer 0 Trade makes each party stronger o By trading with others people can get a greater variety at lower cost 12b Principle 6 Markets are Usually a Good Way to Organize Economic Activity 0 Market economy an economy that allocates resources through the decentralized decisions of many rms and households as they interact in markets for goods and services 0 Decisions are made by millions of individual households and rms 0 Prices are the instruments with which the invisible hand directs the economy 0 Buyers look at the price when determining how much to demand sellers look at price when determining how much to supply 0 Policies effect the role of the invisible hand s ability to coordinate decisions of the households and rms 12c Principle 7 Governments can Sometimes Improve Market Outcomes 0 We need government to maintain the institutions necessary for the invisible hand to work successfully Property rights the ability of an individual to own and exercise control over scarce resources 0 Controlled by government 0 Market failure a situation in which a market left alone fails to ef ciently allocate resources 0 One cause is externality impact of one persons actions on the wellbeing of a bystander 0 Another failure is market power ability of a single economic actor to have substantial in uence on market price 0 Invisible hand does not ensure equal distribution among people ofgoods 13 HOW THE ECONOMY AS A WHOLE WORKS 13a Principle 8 A Countrv s Standard of Living Depends of its AbilitV to Produce Goods and Services 0 Almost all variations in living standards are attributable to differences in countries productivity 0 Productivity quality of goods and services produced each unity of labor input 0 The relationship between standard of living and productivity is simple but the implications are far reaching 0 To boost living standard policy makers must boost productivity 13b Principle 9 Prices ride when the Government Prints too much Money 0 In ationan increase in the overall level of prices in the economy 0 Keeping in ation low is a goal of policy makers 13c Principle 10 Society Forces ShortRun TradeOff between In ation and Unemployment Adding money to the economy in the short run means 0 More stimulates to spend 0 Firms raise prices so therefore can hire more workers 0 More hiring means lower unemployment Business cycle uctuations in economic activity such as unemployment and production
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