CHAPTER 1

- 3 economic agents
+ Government
+ Firm
+ Household/Individual
- Economic problem
+ Government: Use limited resources to satisfy unlimited wants
+ Firm: Use limited resources to satisfy unlimited wants
+ Household/individual: Use limited resources to satisfy unlimited wants
- Scarcity (khan hiếm): the condition in which our wants are greater than the
resources available to satisfy those wants
- Economics is the study of how economic agents make decisions.
- 3 Types of market:
+ Markets for goods and services
+ Markets for factors of production
+ Financial markets
- 3 basic questions
+ What goods to produce?
+ How to produce them?
+ who gets them?
- 3 economic systems
+ Command economy (planned economy)
+ Market economy (free market economy)
+ Mixed economy
- Adam Smith's Invisible Hand
* Famous insight by Adam Smith in The Wealth of Nations (1776):
+ Each household and firm acts as if “led by an invisible hand” to promote

general economic well-being Each household and firm acts as if “led by an

invisible hand” to promote general economic well-being
* The invisible hand works through the price system
+ The interaction of buyers and sellers determines prices
+ Each price reflects the good’s value to buyers and the cost of producing
the good.
 + Prices guide self-interested households and firms to make decisions that,
in many cases, maximize society’s economic well-being.
- Macroeconomics is the study of economy-wide phenomena, including
inflation, unemployment, and economic growth.
- Microeconomics is the study of how buyers and sellers make decisions and
how they interact in markets
- In the market for goods and services,
+ Buyer: Households and government.
+ Seller: Firms.
- Positive economics
+ Factual analysis, the analysis of “What is”.
+ There is no personal judgment involved
- normative economics
+ Opinion-based analysis, the analysis of “What should be”.
+ Involves personal judgments or ideals
+ Normative statements cannot be proven or disproven
- Model: a highly simplified representation of
a more complicated reality.
+ Economists use models to study economic issues.
- An economic model includes:
+ Theory
+ Assumption
+ Equation
+ Data
- Why Economists Disagree?
+ They may have different opinions and value judgments and, therefore,
different normative views about what policy should try to accomplish
+ They may use different assumptions
- Economists play two roles
+ Scientists: try to explain the world.
+ Policy advisers: try to improve the world.
- 10 principles
+ People face trade-offs
+ The cost of something is what you give up to get it
+ Rational people think at the margin (For example, if you are deciding
whether to buy one more slice of pizza, you will compare the marginal
benefit (the satisfaction of eating the pizza) to the marginal cost (the price
of the pizza))
+ People respond to incentives (For example, if the government raises taxes
on cigarettes, people are less likely to smoke)
+ Trade can make everyone better off (For example, if you are good at
making pizzas and I am good at growing vegetables, we can both benefit by
trading pizzas for vegetables)
+ Markets are usually a good way to organize economic activity (For
example, if there is a shortage of a particular good, its price will rise, which
will signal to producers to produce more of that good)
+ Governments can sometimes improve market outcomes (For example, if
the government tries to set a price ceiling on a good, this may lead to a
shortage of that good)
+ A country's standard of living depends on its ability to produce goods and
services (This is because the more goods and services a country can
produce, the higher the standard of living for its citizens)
+ Prices rise when the demand for a good or service exceeds the supply
(This is because when there are more buyers than sellers, buyers are willing
to pay more to get the good or service)
+ Inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time (Inflation can be caused by an
increase in the money supply, an increase in the demand for goods and
services, or a decrease in the supply of goods and services)