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Chapter 1: 12 Principles of Economics

by: Nina Lyow

Chapter 1: 12 Principles of Economics Econ 2100

Marketplace > Georgia Institute of Technology > Economics > Econ 2100 > Chapter 1 12 Principles of Economics
Nina Lyow
Georgia Tech
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About this Document

Detailed explanation of the principles with examples to support each principle
Economics and Policy
Dr. Fritz
Class Notes
market, Economics, incentive, equity, Equilibrium




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This 3 page Class Notes was uploaded by Nina Lyow on Wednesday August 17, 2016. The Class Notes belongs to Econ 2100 at Georgia Institute of Technology taught by Dr. Fritz in Fall 2016. Since its upload, it has received 4 views. For similar materials see Economics and Policy in Economics at Georgia Institute of Technology.

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Date Created: 08/17/16
Econ 2100 Chapter 1: First Principles Vocabulary Economics: the social science that studies the production,distribution, and consumption of goods and services Economy: A system for coordinating society’s productive activities Microeconomics: The branch of economics concerned with how people make decisions and how these decisions interact Macroeconomics: branch of economics concerned with the overall ups and downs in the  economy Markey Economy: An economy in which decisions about production and consumption are  made by individual producers and consumers Market Failure: When the individual pursuit of self­interest leads to bad results for society Recession: A downturn in the economy Economic growth: The growing ability of the economy to produce goods and services Invisible hand: the idea that the individual pursuit of self­interest can lead to good results for  society as a whole Individual choice: is the dicision by an individual of what to do, which necessarily involves a  decision of what not to do The 12 Principles I. Principles of individual choice: 1. People must make choices because resources are scarce 2. The opportunity cost of an item­what you might give up in order to get it­is its true cost 3. How much decisions require making trade offs at the margin comparing the costs and  benefits of doing a little bit more of an activiry versus doing a little bit less 4. People usually respond to incentives exploiting opportunities to make themselves better  off 1. Resources are scare a. Resources is anything that can be used to produce something else 2. Opportunity Cost: what you must give up in order to get it. The real cost of an item. All  economic costs are opportunity costs. Forgo. Opportunity cost of attending College is  high: cost of tuition and other expenses plus the forgone salary you could have earne 3. Marginal Analysis a. Tradeoff: when you compare the costs with the benefits of doing something b. Many decisions are not ether­or but instead” how much” c. Marginal decisions: to do more or less of an activity d. Decosopms are made at the margin e. Marginal anlaysis: study of such decisions f. Ex: studying one more hour, eating one more cookie 4. Exploiting Opportunities: take advantage of opportunities to make themselves better off a. Incentives: anything that offers rewards to people who change their behavior II. The principles of interaction of individual choices Interaction of choices is a feature of most economic situation 5. There are gains from trade 6. Because eople respond to incentives. Markets move toward equilibrium 7. Resources should be used as efficiently as possible to achieve society’s goals 8. Because people usually exploit gains from trade, markets usually lead to efficiency 9. When markets don’t achieve efficiency, government intervention can improve society’s  welfare 5.  Gains from Trade a. Trade: individuals provide goods and services to others and receive goods and services  in return b. people can get more of what they want through trade than they could if they tried to be  self­sufficient c. specialization: when each person specializes in the task that he or she is good at  performing 6. Equilibrium a. no individual would be better off doing something different b. because people respond o incentives, markets move toward equilibrium c. any time there is a change, the economy will move to a new equilibrium 7. Efficiency vs.Equity a. efficient: if it takes all opportunities to make some people better off without making  other people worse off b. equity: means that everyone gets his or her fair share.  Ex: disabled­designated parking spaces Equity makes life “fairer” for people with disabilities Efficiency makes sure that all opportunities to make people better off have been fully  exploited by never letting parking spaces go unused 8. Markets usually lead to efficiency The incentives built into a market economy ensure that resources are usually ut to good use and  that opportunities to make people better off are not wasted Market failure: in which the individual pursuit of self­interest foundin markets makes society  worse off, may result in an inefficient market outcome 9. Government intervention can improve societ’s welfare Markets fails because: some goods cannot be efficiently managed by markets, one party prevents mutually beneficial trades from occurring in the attempt to capture a greater share of resources  for itself, individual actions have side effects not taken into account by the market III. Economy Wide Interactions 10. One person’s Spending is another person’s income Economy is linkd and changes in sending behavior have repercussions throughout the  economy(farmer­miller­baker­bread consumer) 11. Overall spending sometimes ges out of line with the economy’s productive capacity The amount of goods and services people and businesses want to buy sometimes does not match  the amount of goods and service the economy is capable of producing 12. Government policies can change spending Government uses three tools(government spending,taxes, and quantity of money in circulation)  that can have a large impact on the economy.


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