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Chapter 1
10 principles of economics
 Contents

1 •Define Economics

2 •How people make decisions

3 •How people interact

4 •How economy as a whole works

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 Why should we study economics?

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 Define Economics

Resources are scarce

Scarcity: the limited nature of society’s resources
Society has limited resources
Cannot produce all the goods and services
people wish to have
Economics
The study of how society manages its scarce
resources

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 Define Economics

Economists study:
How people decide what to buy, how much to
work, save, and spend.
How firms decide how much to produce, how
many workers to hire.
How society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs.

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 How People Make Decisions

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 Principle 1: People Face Trade-offs

To get something that we like, we have to give up

something else that we also like
Going to a party the night before an exam
Less time for studying
Having more money to buy stuff
Working longer hours, less time for leisure
Protecting the environment
Resources could be used to produce consumer
goods

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 Principle 1: People Face Trade-offs

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 Principle 1: People Face Trade-offs

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

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

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 Principle 3: Rational People Think
at the Margin

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 Principle 3: Rational People Think
at the Margin
Examples:
A manager considers whether to increase output
Compares the cost of the needed labor and
materials to the extra revenue

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 Principle 4: People Respond
to Incentives

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 How People Interact

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 Principle 5: Trade Can Make
Everyone Better Off

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 Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity

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 Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity

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 Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity

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 The Invisible Hand

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 Principle 7: Governments Can Sometimes
Improve Market Outcomes

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 Principle 7: Governments Can Sometimes
Improve Market Outcomes

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 How the economy as a whole works

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 Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services

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 Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services

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 Principle 9: Prices Rise When the Government
Prints Too Much Money

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 Inflation in Venezuela

3 kgs of Bolivar (9.5 millions) to buy 1 kg of beef!

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 Principle 10: Society Faces a Short-Run Trade-
off between Inflation and Unemployment

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 10 principles of economics song

Since the behavior of an economy reflects the

behavior of the individuals who make up the
economy, we begin our study of economics with
four principles of individual decision making.

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 Summary

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