Topic to be covered

* Economics Definition * 10 Principles of Economics * What to produce * How to produce * For whom to produce * Normative and Positive Economics * Production possibility frontier * Economic growth * Circular Flow of Economic Activity

Ten Principles of Economics

1. People face tradeoffs. To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading one goal for another. For example, say you are offered a chocolate bar or a lollipop. You have to choose to give up one to get the other.

2. The cost of something is what you give up to get it. The second economic principle emphasizes the cost of whatever it is you gave up. Because people face trade off, making decisions requires comparing the costs and benefits of alternative courses of action. For example, you took the lollipop, which has an economic profit, what you gain from the choice, of $.85. But you had to give up the chocolate, which had an economic profit of $.45. So you actually only gained $.40 for your choice. But if you didn't have a choice and were only offered the lollipop, you wouldn't have given anything up and would have gained an economic profit of $.85.

3. Rational people think at the margin. Economists generally assume that people are rational. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. Marginal thinking is to make small adjustments. For example, a movie theater offers matinee prices. The theater knows

fewer people see movies in the afternoon. The standard ticket price of the movie is $10 and at that price the theater will sell two tickets for a matinee show. But by offering a $6 matinee price, the theater ended up selling five tickets. By selling the tickets at a 40 percent discount, the theater actually made $10 more.

4. People respond to incentives. Because rational people make decisions by weighing costs and benefits, their decisions may change in response to incentives. Incentive is something that causes a person to act. Because people use cost and benefit analysis, they also respond to incentives Ex. Higher taxes on cigarettes to prevent smoking

5. Trade can make everyone better off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services. 6. Markets are usually a good way to organize economic activity. Adam Smith and the Invisible Hand Adam Smiths 1776 work suggested that although individuals are motivated by self-interest, an invisible hand guides this self-interest into promoting societys economic well-being. Markets are defined simply as a place where people make an agreement, settle on a price and then communicate that to the world at large. The food market, for example, has farmers making an agreement to sell at a set price and then supermarkets communicate that by selling the food to the public.

7. Governments can sometimes improve economic outcomes. The government may get involved if the market efficiency isn't working or if the market is failing to distribute. This failure is often caused by externality, which means that the product impacts more than just the direct buyers and sellers. For example, cars benefit drivers, but emissions are also a health concern for people.

8. The standard of living depends on a countrys production.

The more goods and services produced in a country, the higher the standard of living. As people consume a larger quantity of goods and services, their standard of living will increase

9. Prices rise when the government prints too much money. This principle refers to inflation. When too much money is floating in the economy, there will be higher demand for goods and services. This will cause firms to increase their price in the long run causing inflation.

10. Society faces a short-run tradeoff between inflation and unemployment. Also referred to as the Phillips Curve, this principle says that you can't keep unemployment low and inflation under control at the same time and, therefore, create a tradeoff. In the short run, when prices increase, suppliers will want to increase their production of goods and services. In order to achieve this, they need to hire more workers to produce those goods and services. More hiring means lower unemployment while there is still inflation. However, this is not the case in the long-run.