Principles of Economics

Introduction to Economics

• Economy: Derived from the Greek word meaning "one who manages a household."
• Economics: The study of how societies use limited resources to produce, trade, and consume goods and services.
• Scarcity: Society has limited resources and cannot produce all the goods and services people wish to have.
• Good Decision Making: Managing scarce resources effectively.

Scarcity

• Applies to everyone, including wealthy individuals.
• Example: Even wealthy individuals like Glenn Taylor face constraints such as time.
• Factors of Production: Inputs used to produce goods and services.
  • Natural Resources: Land, water, minerals, oil, and gas deposits (renewable and non-renewable).
  • Labor: Human effort, both physical and mental.
  • Physical Capital: Machines, buildings, equipment.
  • Human Capital: Knowledge and skills acquired through education and experience.
  • Entrepreneurship: Coordinating production and sales, taking risks, and committing resources.

10 Principles of Economics

Group 1: How People Make Decisions

1. People Face Trade-Offs

   • Doing one thing means giving up another.
   • Examples: Guns vs. butter, food vs. clothing, leisure vs. work, efficiency vs. equity.
   • Efficiency: Maximizing production.
   • Equity: Fair distribution of benefits.

2. The Cost of Something is What You Give Up to Get It

   • Decisions require comparing costs and benefits of alternatives.
   • Opportunity Cost: The next best alternative that must be forgone.
   • Examples: Kobe Bryant choosing to go pro instead of college, the cost of loaning money, and the true cost of building a stadium.

3. Rational People Think at the Margin

   • Marginal changes: Small, incremental adjustments.
   • Example: Deciding whether to keep a store open for an extra hour.
   • Marginal benefits vs. marginal costs.

4. People Respond to Incentives

   • Incentives change behavior.
   • Incentives: Expected benefits minus opportunity cost.
   • Example: Government policies affecting incentives, extra credit in class to motivate students.

Applications and Exercises

• Decision-making exercises involving opportunity costs and marginal benefits/costs.
• Example: Deciding whether to repair a car transmission based on repair costs and resale value.

Next Steps

• Read the rest of Chapter 1 and Chapter 2.
• Upcoming topics: How people interact with each other and the forces affecting the economy as a whole.