Chapter 1

Definitions

1. Scarcity – scarcity means that society has limited resources and therefore cannot produce
all the goods and services that people wish to have.
2. Economics – economics is the study of how society manages its scarce resources (to satisfy
people’s wants and needs.
3. Efficiency – efficiency means that the society is getting the maximum benefits from its
scarce resources.
4. Equality – equality is the property of distributing economic prosperity uniformly among the
members of society.
5. Opportunity cost – the opportunity cost of an item is what you give up to get that item.
6. Rational people – people who systematically and purposefully do the best they can to achieve
their objectives (ရည်မှ န်းချက်)

Eg- consumers>> maximum satisfaction // firms>> maximum profit

7. Marginal change – marginal change is the small incremental adjustment to an existing plan
of action. [rational people only take actions when MB marginal benefit is greater than MC
marginal cost.]
8. Incentive – incentive is something that induces a person to act.
Eg. Higher price >> buyers consume less and sellers produce more,
public policy >> change costs or benefits, change people’s behavior, can have unintended
consequences.
9. Market economy – an economy that allocates resources through the decentralized
(controlled by several authorities rather than one single one) decisions of many firms and
households as they interact in markets for goods and services (guided by prices and self-
interest) [ an invisible hand - By pursuing his own interest, he frequently promotes that of
the society more effectually than when he really intends to promote it.]

What is the difference between a planned economy and a market economy?

 In a planned economy, the decisions on investment, production, distribution and
pricing are taken by the government. In contrast, market economies do not have a
decision maker but they operate on free market flow

10. Trade >> could be a positive sum. / allows each person to specialize in the activities he or
she can do best. Enjoy a greater variety of goods and services.
11. Property rights – ability of an individual to own and exercise (အသုံ းချသည်/ ကျင့် သုံ းသည်)

control over scarce resources.

12. Market failure – a situation in which a market left on its own fails to allocate resources
efficiently
13. Externality – the impact of one person’s actions on the well-being of a bystander (eg.
Pollution)
14. Market power – the ability of a single economic actor (or a small group of actors) to have a
substantial influence on market prices
15. Productivity – the quantity of goods and services produced from each unit of labor input
16. Inflation – an increase in the overall level of prices in the economy
17. Business cycle – fluctuations in economic activity, such as employment and production
Quick Quiz
1.1How people make decisions (individual decisions)
Principle 1 People face trade-off
Principle 2 The cost of something is what you give up to get it
Principle 3 Rational people think at the margin
Principle 4 People respond to incentives

1. Economics is best defined as the study of how society manages its scarce resources.
2. Your opportunity cost of going to a movie is the total cash expenditure needed to go to
the movie plus the value of time.
3. A marginal change is one that incrementally alters an existing plan.
4. Because people respond to incentives, 1. Policymakers can alter outcomes by changing
punishments or rewards. 2. Policies can have unintended consequences. 3. Society faces
a trade-off between efficiency and equality.

1.2How people interact

Principle 5 Trade can make everyone better off
Principle 6 Markets are usually a good way to organize economic activity
Households and firms interacting in markets act as if they are guided by an invisible hand which
leads them to desirable market outcomes.
Principle 7 Governments can sometimes improve market outcomes

5. International trade benefits a nation when all nations are specializing in producing what
they do best.
6. Adam Smith’s “invisible hands” refers to the ability of free markets to reach desirable
outcomes, despite the self-interest of market participants.
7. Governments may intervene in a market economy in order to 1. Protect property rights.
2. Correct a market failure due to externalities. 3. Achieve a more equal distribution of
income.
Principle 8 A country’s standard of living depends on its ability to produce goods and services
Principle 9 Prices rise when the government prints too much money
Principle 10 Society faces a short-run trade-off between inflation and unemployment.

8. The main reason that some nations have higher average living standards than others is
that some nations have higher level of productivity.
9. If a nation has a high and persistent inflation, the most likely explanation is the central
bank creating excessive amounts of money.
10. If a central bank uses the tools if monetary policy to reduce the demand for goods and
services, the likely result is lower inflation and higher unemployment rate in the short
run.