Ten Principles of Economics

- Resources must be allocated correctly.

- We have unlimited needs/ desires but scarce resources (oil, labor, land, …)
- Economics: the study of how society manages its scarce resources to fulfill the
unlimited needs.
- Microeconomics: the study of how consumers and firms make decisions and how they
interact in specific markets.
- Macroeconomics: the study of the effect on the aggregate economy of choices made
by individuals, firms and government.
- Managerial Economics: applies micro-economic theory to management decisions.

How people make decisions:

1. People face trade-offs
a. To get one thing, we have to give up something else.
b. Equity ≠ Efficiency (to increase equity, gotta decrease efficiency and vice versa)
i. Efficiency: the society gets the most that it can from its scarce resources.
ii. Equity: the benefits of those resources are distributed fairly among the
members of society.
2. The cost of something is what you give up to get it.
a. Opportunity Cost: the highest-valued alternative that must be given up to obtain
something.
3. Rational people think at the margin.
a. Decision makers will make the best decisions by thinking at the margin/ edge.
b. Marginal Cost: extra cost to produce 1 extra good.
4. People respond to incentives.
a. Change in price, change in buying behaviour
b. Change in grading, change in class attendance

How people interact with each other:

5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
a. Market Economy: an economy that allocates resources through the
decentralized decisions of many firms and households as they interact in markets
for goods and services.
7. Governments can sometimes improve economic outcomes.
a. Markets do not always lead to optimal allocation of resources.
b. So the government has to interfere to promote efficiency and equity.
c. Efficiency
i. Market failure occurs when the market fails to allocate resources
efficiently. Caused by:
1. Externality: impact of one person or firm’s actions on the
well-being of a bystander.
 2. Market Power: the ability of a single person or firm to unduly
influence market prices.
d. Equity
i. The invisible hand (as if it's taking care of the economy itself) is even less
able to ensure a fair distribution of economic prosperity.

Positive Statements: statements that attempt to describe the world as it is.

Normative Statements: statements about how the world should be. It is a normative statement
when it includes should in it.