10 Principles of Economics.pptVIP

Economy and Household Management Economies and Households Economy originates from the Greek - “one who manages a household.” Economies and Households have got much in common Members of different abilities and various desires Scarce resources To choose – to make decisions – to allocate What shall be done? What shall be produced? Who shall do it and how? Who shall get how much of the output in return? How? Economics Economics Economics is the study of how society manages its scarce resources. How people make decisions – to figure out how much they work, what they buy, how much they save, and how they invest their savings. How people interact with one another – to examine how the multitude of buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold How an economy works as a whole – to analyze forces and trends that affect the economy as a whole How people make decisions – Principle 1 People Face Tradeoffs “There is no such thing as a free lunch.” Making decisions requires trading off one goal against another. People are likely to make good decisions only if they understand the options that they have available. Desires are unlimited Resources are limited To give up one item in order to get another item To exchange what you have for what you want Tradeoff between Guns and Butter Tradeoff between Efficiency and Equity How people make decisions – Principle 2 The Cost Of Something Is What You Give Up To Get It Making decisions requires comparing the costs and benefits of alternative courses of action. Opportunity Cost - what you give up to get a certain item. When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action. Cost-Benefit Calculation How people make decisions – Principle 3 Rational People Think at the Margin Margin means edge. Marginal changes - adjustments around the edges of what you are doing Economists use the term marginal changes to descr