Ten Principles of Economics Chapter Economy The word economy comes from a Greek word for “one who manages a household.” Society and Scarce Resources: ✔The management of society’s resources is important because resources are scarce ✔Scarcity implies choice and choice implies cost Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have Economics Economics is the study of how society manages its scarce resources Economists study ◆ How people make decisions ◆ How people interact with each other ◆ The forces and trends that affect the economy as a whole Ten Principles of Economics How People Make Decisions People face tradeoffs The cost of something is what you give up to get it Rational people think at the margin People respond to incentives Ten Principles of Economics How People Interact Trade can make everyone better off Markets are usually a good way to organize economic activity Governments can sometimes improve economic outcomes Ten Principles of Economics How the Economy as a Whole Works The standard of living depends on a country’s production Prices rise when the government prints too much money 10 Society faces a short-run tradeoff between inflation and unemployment Allocation Problems Each society, no matter how large or how organized it is, has to consider and solve the following ‘fundamental economic problems’: What to produce and how many units? (More rice or more cars, more universities or more environmental commodities) How to produce these commodities? (labor-incentive, capital-intensive or environmental-intensive production?) For whom to produce these commodities? (Who shall have access to these commodities – Distribution Problem?) Microeconomics and Macroeconomics ◆ Microeconomics focuses on the individual parts of the economy ◆ How households and firms make decisions and how they interact in specific markets ◆ Macroeconomics looks at the economy as a whole ◆ How the markets, as a whole, interact at the national level The Production Possibilities Frontier •Shows the various combinations of two goods that can be produced by one firm •Assumes two goods •Assumes fixed technology and fixed factors of production The Production Possibilities Frontier Quantity of Computers Produced 4,000 An outward shift in the production possibilities frontier 3,000 E 2,100 2,000 A 700 750 Increase in technology to produce computers 1,000 Quantity of Cars Produced Concepts Illustrated by the Production Possibilities Frontier ◆ Efficiency ◆ Tradeoffs ◆ Opportunity Cost ◆ Economic Growth [...]... (labor-incentive, capital-intensive or environmental-intensive production?) 3 For whom to produce these commodities? (Who shall have access to these commodities – Distribution Problem?) Microeconomics and Macroeconomics ◆ Microeconomics focuses on the individual parts of the economy ◆ How households and firms make decisions and how they interact in specific markets ◆ Macroeconomics looks at the economy... the various combinations of two goods that can be produced by one firm •Assumes two goods •Assumes fixed technology and fixed factors of production The Production Possibilities Frontier Quantity of Computers Produced 4,000 An outward shift in the production possibilities frontier 3,000 E 2,100 2,000 A 700 0 750 Increase in technology to produce computers 1,000 Quantity of Cars Produced Concepts... frontier 3,000 E 2,100 2,000 A 700 0 750 Increase in technology to produce computers 1,000 Quantity of Cars Produced Concepts Illustrated by the Production Possibilities Frontier ◆ Efficiency ◆ Tradeoffs ◆ Opportunity Cost ◆ Economic Growth