CHAP 1. TEN PRINCIPLES OF ECONOMICS

I. Introduction

A. The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.”

B. This makes some sense because in the economy we are faced with many decisions (just as a household is).

C. Fundamental economic problem: resources are scarce.

D. Definition of scarcity: the limited nature of society’s resources.

E. Definition of economics: the study of how society manages its scarce resources.

II. How People Make Decisions

A. Principle #1: People Face Trade-offs

1. “There ain’t no such thing as a free lunch.” Making decisions requires trading one goal for another.

2. Examples include how students spend their time, how a family decides to spend its income, how the U.S. government spends tax dollars, and how regulations may protect the environment at a cost to firm owners.

3. A special example of a trade-off is the trade-off between efficiency and equality.

a. Definition of efficiency: the property of society getting the maximum benefits from its scarce resources.

b. Definition of equality: the property of distributing economic prosperity uniformly among the members of society.

c. For example, tax dollars paid by wealthy Americans and then distributed to those less fortunate may improve equality but lower the return to hard work and therefore reduce the level of output produced by our resources.

d. This implies that the cost of this increased equality is a reduction in the efficient use of our resources.

4. Recognizing that trade-offs exist does not indicate what decisions should or will be made.

B. Principle #2: The Cost of Something Is What You Give Up to Get It

1. Making decisions requires individuals to consider the benefits and costs of some action.

2. What are the costs of going to college?

a. We cannot count room and board (at least all