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ECON Chapter 1

Chapter 1
• Scarcity-the limited nature of society’s resources
• Economics-the study of how society manages its scarce resources
#1-People face tradeoffs-so people got to sacrifice sth in order to get something for example we want
to study to classes for the hours we spend studying on the first class that’s how much hours we give up
on studying for the second class.
• Efficiency-getting the maximum benefits for resources
• Equity-Benefits distributed fairly among society members
#2-The cost of something is what you give up to get it
• Opportunity cost-what you give up to get that item
#3-Rational people think at the margin
• Rational people-systematically and purposefully do the best they can to achieve their goals
• Margin changes-small incremental adjustments to a plan of action
• So the average cost is what you think you will spend the margin cost is what you really spent.Like the
aeroplane example the average cost of flying is 500 but the margin cost is a bag of peanuts so any
prices that exceeds the marginal cost is profitable.Rational people make decisions by comparing cost
and benefits.
#4-People respond to incentives
• Incentive-Something that induces a person to act
• Incentive can have direct and indirect effect.
• Marginal benefits Is the benefit form each additional increment and marginal cost is the same only
cost.Compare them.
#5-Trade can make everyone better of
• Trade it’s not like a contest but sth that gives value from both sides and give someone the ability to
#6-Markets are usually a good way to organize economic activity
• Market economy-a market that works through the free decisions of firms and household as they
interact in markets.
• So sellers and buyers make the market by themselves and work very good as their being controlled
by the invisible hand.
#7-Governments can sometimes improve market outcomes
• Property rights-The ability of an individual to own and exercise control over scarce resources
• Market failure-a situation in which a market left on its own fails to allocate resources.
• Externality-the impact of one person actions on the well being of a bystander or a person who
doesn’t take action.
• Market power-The ability of a person or group to influence the market.
• Government can help markets by creating laws and interfering in efficiency and equity.
#8-A country’s standard for living depends in its ability to produce goods and services.
• Productivity-the amount of goods produced form each unit of labor input.
#9-Prices rise when the government prints to much money
• Inflation-increase of the overall prices in the economy.
• Inflation is caused by the growth in the quantity of money.
#10-Society faces a short run tradeoff between inflation and unemployment.So when one is high the
other go down.
• Business cycle-fluctuations(irregular rising and falling in number) in economic activities such as
unemployment and production.