Principles of Economics Part One Introduction

Ten principles
How people make decisions

1, people face tradeoffs

There is no such thing as a free lunch. Making decisions requires trading off one goal against another.

E.g. how to allocate his own most valuable resource for a student. Part-time job or study

E.g. how to spend their family income for parents. Buy goods or children education

E.g. Classic tradeoff is between “guns and butter”.

E.g. society faces tradeoff between efficiency and equity. If a cake divided more equally, the smaller the cake is produced. Tax can be used to controlled this society cake.

2, the cost of something is what you give up to get it

In many cases, however, the cost of some action is not as obvious as it might first appear.

E.g. the decision whether to go to college. We need to consider many attributes, time and cost.

Opportunity cost of an item is what you give up to get that item

3, rational people think at the margin

Margin change is used to describe small incremental adjustments to an existing plan of action

Margin costs lead to margin benefits

E.g. the airline deciding how much to charge passengers who fly standby

4, people respond to incentives

The behavior may change when the costs or benefits change. However, the result of some action cannot be clearly predicted. Sometime these actions can end up with result that is not intended.

E.g. improving auto safety, to assign seat belts, finally more accidents (including driver without seat belts and pedestrians)

 

How people interact

5, trade can make everyone better off

By trading with others, people can buy a greater variety of goods and services at lower cost.

6, markets are usually a good way to organize economic activity

Free market contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being.

One invisible hand pushes this kind of economics. The policy published by government on market economic will indirectly limit the ability of this invisible hand.

7, government can sometime improve market outcome

The invisible hand usually leads markets to allocate resources efficiently. However, sometimes it own fails and it called market failures.

E.g. externality is the impact of one person’s action on the well-being of a bystander. That is pollution.

E.g. market power is the ability of a single economic actor (or small group of actors) to have a substantial influence on market power. That is monopoly.

The invisible hand is even less able to ensure that economic prosperity is distributed fairly.

 

How the economy as a whole works

8, a country standard of living depends on its ability to produce goods and services

Productivity is the amount of goods and services produced from each hour of a worker’s time.

Productivity is the primary determinant of living standards.

Policy affects living standards, and the key question is how it will affect our ability to produce goods and services.

E.g. the government’s budget deficit. We need to consider borrowing balance among borrowers, student education, physical capital and etc.

9, prices rise when the government prints too much money

Inflation

The larger the quantity of money is, the small the value of money is, the higher prices are.

10, society faces a short-run tradeoff between inflation and unemployment

Reducing inflation causes rise in unemployment.

Phillips curve is the tradeoff between inflation and unemployment.

The tradeoff between inflation and unemployment is only temporary, but it can last for several years.

Because of the sticky property of money, during short period, reduce inflation. In next period, reduce unemployment. This is short-run strategy.