Chap 1: Ten principles of Economics

Economics
- Objects: human being (society)
- Concepts:
 Solution because of the conflict between demands (unlimit) and
resources (scarce).
 Three objectives.
 Methods: assumption.
Brands of Economics
- Microeconomics
- Macroeconomics
Economics statement
- Positive statement: description, explanation
 Scientific
 Objective
- Normative statement: prescription, suggestion, advice, direction, warning
 Subjective
 Key words: “should”, “must” = “have to”, “if not…then”
Fundamental Problems in Economy
1.Three subjects who make decisions in an Economy
- Household
- Firms
- Government
2.Three fundamental/main problems
- What to produce?
- How to produce?
- Who get it?
3.Ten principles of economics
4 principles of making decision
 People faces trade-offs (Choices vs. Trade-offs)
- To get one thing, we usually have to give up another thing.
- E.g: guns vs butter, food vs clothing, leisure time vs work.
  The cost of something is what you give off to get it
- Decisions require comaparing costs and benefits of alternatives.
- Costs: direct cost & opportunity cost.
- The opportunity cost of an item is what you give up to obtain that item.
- “There is no such thing as a free lunch”.
 Rational people think at the margin
- Rational people: người duy lý.
- Many decisions are not “all or nothing” but involve marginal changes –
incremental adjustments to an existing plan.
- Evaluating the cost and benefits of marginal changes => important
 People respond to incentives
- Incentive: something that induces a person to act, i.e. the prospect of a
reward or punishment.
- Rational people respond to incentives because they make decisions by
comparing cost and benefits.
3 principles of interactions among people
 Trade can make everyone better off
- Rather than being self – sufficient, people can specialize in producing one
good or service and exchange it for other goods.
- Countries also benefit from trade and specialization.
 Markets are usually a good way to organize economic activity
- A market is a group of buyers and sellers.
- “Organize economic activity” means determining:
 What goods to produce
 How to produce them
 How much of each to produce
 Who gets them
- In a market economy, these decisions result from the interactions of many
households and firms.
- Famous insight by A. Smith in the work “The Wealth of Nations (1776).
- Each of these households and firms acts as if “led by an invisible hand” to
promote general economic well-being.
- The invisible hand works through the price system:
 The interaction of buyers and sellers determines prices of goods and
services.
 Each price reflects the good’s value to buyers and the cost of
producing the good.
  Prices guide self –interested households and firms to make decisions
that, in many cases, maximize society’s economic well-being.
 Governments can sometimes improve markets outcomes
- Important role of government: enforce property rights (with polices,
courts…).
- People are less inclined to work
3 principles of economy as the whole
 A country’s standard of living depends on its ability to produce goods
and services.
 Prices rise when the government prints too much money.
 Society faces a short-run trade-off between inflation and
unemployment.