Overview
This lecture introduces the ten fundamental principles of economics, covering how individuals, firms, and societies make decisions and interact within the economy.
Principle 1: People Face Trade-offs
- Making decisions requires trading off one goal against another due to limited resources.
- Efficiency means maximizing output from resources; equity means distributing resources fairly.
Principle 2: The Cost of Something Is What You Give Up to Get It
- Opportunity cost is the value of the next best alternative forgone when making a choice.
Principle 3: Rational People Think at the Margin
- Rational individuals weigh marginal benefits and costs before changing their behavior.
Principle 4: People Respond to Incentives
- Behavior changes in response to incentives, which can be positive (rewards) or negative (penalties).
Principle 5: Trade Can Make Everyone Better Off
- Trade allows individuals and countries to specialize and enjoy a greater variety of goods and services.
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
- In market economies, resources are allocated efficiently through the decentralized decisions of households and firms.
Principle 7: Governments Can Sometimes Improve Market Outcomes
- Governments can intervene to promote efficiency or equity when markets fail due to externalities or market power.
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
- Higher productivity leads to a higher standard of living; productivity is the amount of goods and services produced per hour of labor.
Principle 9: Prices Rise When the Government Prints Too Much Money
- Inflation occurs when too much money is created, reducing the value of money and raising prices.
Principle 10: Society Faces a Short-Run Trade-off Between Inflation and Unemployment
- Increased money supply can lower unemployment in the short run but causes inflation.
Key Terms & Definitions
- Efficiency — maximizing output from available resources.
- Equity — fair distribution of economic prosperity.
- Opportunity Cost — value of the best alternative foregone.
- Marginal Change — a small, incremental adjustment to an existing plan.
- Incentives — factors that motivate people to act.
- Productivity — goods and services produced per unit of labor input.
- Market Failure — when a market fails to allocate resources efficiently.
- Externality — impact of one person’s actions on others.
- Inflation — general increase in prices.
Action Items / Next Steps
- Review lecture slides for examples of each principle.
- Prepare to discuss real-world applications of the ten principles in the next class.