ME C1

Economics- the study of how a society manages its scarce resources

Trade can make everyone better off.
Markets are usually a good way to organize economic activity.
Governments can sometimes improve economic outcomes.

10 principles of economics~
Principle #1: People Face Tradeoffs.
To get one thing, we usually have to give up another thing.
Making decisions requires trading off one goal against another
Efficiency v. Equity

Principle #2: The Cost of Something Is What You Give Up to Get It.

Principle #3: Rational People Think at the Margin.
People make decisions by comparing costs and benefits at the margin.

Principle #4: People Respond to Incentives
Marginal changes in costs or benefits motivate people to respond.

Principle #5: Trade Can Make Everyone Better Off.
People gain from their ability to trade with one another.
Competition results in gains from trading.
Trade allows people to specialize in what they do best.

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.
A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Households decide what to buy and who to work for.
Firms decide who to hire and what to produce.

Principle #7: Governments Can Sometimes Improve Market Outcomes.
Market failure occurs when the market fails to allocate resources efficiently.
When the market fails (breaks down) government can intervene to promote efficiency and equity.

Principle #8: The Standard of Living Depends on a Country’s Production.
Standard of living may be measured in different ways:
By comparing personal incomes.
By comparing the total market value of a nation’s production.

Principle #9: Prices Rise When the Government Prints Too Much Money

Principle #10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment.
The Phillips Curve illustrates the tradeoff between inflation and unemployment:
òInflation ð ñUnemployment
It’s a short-run tradeoff!