Econ chapter 1 Summary Essay

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Econ 111 September 9th

Chapter 1 Overview
Economics is all about scarcity, if it wasn’t scarce we wouldn’t care.
Economics is the study of how society manages its scarce resources, ie: how people decide what to buy, how much to work, save and spend.
8 Principles of Economics
1. People Face Trade-Offs- all decisions include trade-offs. How are you going to use your time, making a decision you may never undo. Example: Going to a party the night before your midterm leaves less time for you to study. Society faces an important trade-off: efficiency vs. equality. Efficiency is when society gets the most from its scarce resources. Equity is when prosperity is distributed equally. How are we using our resources? These are only a set of ideas, how these words are used, not defined.
2. The Cost of Something Is What You Give Up to Get It- Making decisions based on comparing costs and benefits of alternative choices. The opportunity cost of any item is whatever must be given up to obtain it. Even once you’ve made a choice you must give up something for it. Example: going to university, you’re giving up money, sleep, work, and most important time. What are you, yourself personally giving up?
3. Rational People Think at the Margin- Rational people systematically and purposefully do the best they can to achieve their objectives. They make changes by evaluating costs and benefits of marginal change. How we describe the government, criticize when they do wrong. It is unreasonable to think that everybody is perfect. We know/believe that we make mistakes. You cannot assume others are irrational otherwise you’ll always misunderstand. The margin is what is the extra amount? Your effort involved, how much is enough? Example: A student will consider whether to go back to school for a second year, he compares the fees and foregone wages to the extra income he could earn without the extra year of education. What do you get out of a degree if you stay? If I’m hiring somebody you hire someone to increase your revenue, how am I going to get that revenue? What extra things must happen to achieve the margin?
4. People Respond to Incentives- Incentive- something that induces a person to act, like the prospect of a reward or punishment. Rational people respond to incentives. Example: When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling trucks. If government increases minimum wage small business will be unhappy. Must discuss the pros/cons. The people make the decisions. Economics all comes down to the decisions that people make. Make choices where everybody benefits. Decisions to effect decisions
5. Trade Can Make Everyone Better Off- Rather than being self-sufficient, people specialize in producing one good or service and exchange it for other goods. Countries can benefit from this when they buy other goods more cheaply from abroad than could be produced at home. Example: Canada Japan sees the wheat as more valuable than computers and vice versa. People trade to improve their condition.
6. Markets Are Usually A Good Way to Organize Economic Activity- Decisions people make, a market will show the decisions made. Market is
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