Instructor: A Tabassum Class Notes ECON 1000

Chapter 1- Ten Principles of Economics

Economics: is the study of how an economy manages its scarce resources.
Study of mankind in the ordinary business of life. (Alfred Marshall)
It’s about people, how they act as individuals, how they interact with one another, and how their
decisions affect the society overall.
Scarcity: Limited nature of society’s resources.
10 Priciples can be grouped into three categories:

A- How People Make Decisions:

Prinicple #1. People Face Tradeoffs:
“There is no such thing as a free lunch”. You have to choose one goal over another. For example
studying economics or pychology or both. You are facing a tradeoff since you can not choose to do
both at the same time.
Economies face with a tradeoff between Efficienty and Equity. If government taxes the wealthy
Canadians and use that money to pay for welfare benefits to less fortunate people. It will increase
equity but people will have less incentive to work hard because of taxes.
Prinicple #2. The Cost of Something is what you give up to get it.
Opportunity Cost. Whatever must be given up to obtain some item.
Since people face tradeoffs, they compare the costs and benefits of their actions.
What is the cost of going to college or University? Time.
Prinicple #3. Rational People think at the margin.
Many decisions in life involve incremental decisions. Should I remain in school this semester? Take
another course? Study an additional hour etc.
Rational People: who systematically and purposefully do the best they can to achieve their
objectives, given the opportunities they have. Rational people will take an action only if the
marginal benefit of the action exceeds its marginal cost.
Prinicple #4. People respond to Incentives.
Incentives: Something that induces a person to act.
Example: An increase in price of apples will lead consumers to buy more pears. Demand for apples
in response to an increase in price will fall. Producers of apples will have incentive to grow more
orchards of apples due to incentive of more profit.

B- How People Interact

Prinicple #5. Trade can Make everyone better off.
Trade is not like sports competition where one side wins and other loses.
Specialization and comparative advantage make all trading partners better off.
Trade takes place inside your home; Families trade with other families; most of them don’t build
their own homes, produce their own food or clothing etc. Just like families, countries benefit from

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Instructor: A Tabassum Class Notes ECON 1000

trade. Trade makes everyone better off because each country or family can speciallize in the areas
it can do best.
Prinicple #6. Markets are usually a good way to organize economic activity
Market Economy: An economy that allocates resources through the decentralized decsions of
many firms and households as they interact in markets for goods and services.
Buyers and sellers decide on how much to buy and how much to produce by looking at the prices.
Market Prices reflect the value and cost of producing a good.
Many countries used to have centralized economies where a central planner in the government
would decide how much to produce and by whom. They have abandoned it and are develping
market economies.
According the Adam Smith, in market economies, the invisible hand guides the economic activity.
People in market economies are guided by self interest but “the invisible hand” guides their self
interests into promoting the soceity’s economic well-being.
Prinicple #7. Governments CAN sometimes improve the market outcomes.
If the invisible hand is so great, why do we need the Governments.
Invisible hand is great but it’s not omnipotent. The magic of invisible hand will work only if the
government enforces the rules and maintains institutions that are key to economic activity.
Examples: Property rights- A farmer won’t grow food if he thinks someone will steal his produce.
Market Failure: Governments can intervene if the markets are unable to function with efficiency.
Examples: Externality. If production of something is affecting adversely the well-being of gerneral
public. Pollution; Market Power: If a single actor in the market has a substantial influence on
market prices, the govt. can intervene to improve efficiency.
Government can also intervene to imporve the distribution of economic prosperity.

C- How the Economy as a Whole Works

Prinicple #8. A Country’s Standard of Living Depends on its Ability to Produce Goods and
Services.
Differences in living standards from one country to another are very large. In 2010, Average HH
income in Canada was $43000, in Mexico $10000 and in Nigeria it’s only $1400.
Productivity: The quantity of goods and services produced from each hour of a workers’ time.

Prinicple #9. Prices Rise When Government Prints Too Much Money.
Inflation: An increase in the overall level of prices in the economy.

Prinicple #10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.
Government can exploit this tradeoff using various policy instruments but there is a debate among
Economists over the desirablity of such interventions.