Overview
This lecture introduces the foundational concepts of economics, focusing on scarcity, decision-making, and the ten basic economic principles that guide human behavior and society.
What is Economics?
- Economics studies how society manages unlimited wants with limited resources (scarcity).
- Scarcity leads to trade-offs because it's impossible to produce all goods and services people want.
- Economics is broadly the study of human behavior, specifically decision-making.
- Economic analysis applies to both obvious (business cycle, inflation) and less obvious (waiting to mow the lawn, eating at a buffet) decisions.
- Economists study choices in everyday life, not just money or business topics.
Ten Principles of Economics
1. People Face Trade-Offs
- Choosing one thing means giving up another due to limited resources (income, time, opportunities).
- Society faces trade-offs like "guns vs. butter" (defense vs. consumer goods) and efficiency vs. equity.
2. The Cost of Something is What You Give Up to Get It (Opportunity Cost)
- Opportunity cost is your next best alternative forgone when making a choice.
- Cost includes more than just money—also time, effort, or other resources.
3. People Respond to Incentives
- Incentives can be economic (money, grades), social (acceptance, ridicule), or moral (right vs. wrong).
- Not everyone responds to the same incentive in the same way.
- Behavior changes when incentives change.
4. People Think at the Margin
- Decisions are made by comparing marginal (additional) benefits and costs.
- An action continues if marginal benefit exceeds marginal cost.
5. Trade Can Make Everyone Better Off
- Voluntary trade benefits all parties, not a zero-sum game.
- Less trade means more self-sufficiency and fewer benefits.
6. Markets Are the Best Way to Organize Economic Activity
- Free markets (within the law) allocate resources efficiently compared to planned economies (communism, socialism).
7. Government Can Sometimes Improve Market Outcomes
- Market failures, like externalities (unintended costs to others), may require government intervention.
8. A Country’s Standard of Living Depends on Its Ability to Produce
- Higher productivity leads to higher standards of living.
9. Prices Rise When the Government Prints Too Much Money (Inflation)
- Excess money in the economy increases prices.
10. There Is a Short-Run Trade-Off Between Inflation and Unemployment
- Reducing one often increases the other in the short run.
Key Terms & Definitions
- Scarcity — The condition of limited resources and unlimited wants.
- Trade-off — Sacrificing one thing to gain another.
- Opportunity Cost — The value of the next best alternative forgone.
- Incentive — Something that motivates or influences behavior.
- Marginal Change — A small, incremental adjustment to a plan of action.
- Market Failure — When the free market fails to allocate resources efficiently.
- Externality — A side effect of an activity that affects other parties.
Action Items / Next Steps
- Review the ten principles before the next class.
- Prepare for upcoming discussions on trade and how economists analyze markets.