1. Models
1.1. The Circular-Flow Diagram
1.1.1. The Circular-Flow Diagram: a visual model of the economy, shows how money flows through markets among households and firms
1.1.2. Households: Own the factors of production, sell/rent them to firms for income and buy and consume goods & services
1.1.3. Firms: Buy/hire factors of production, use them to produce goods and services and sell goods & services
1.1.4. The Circular- Flow Diagram
1.2. The Production Possibilities Frontier (PPF)
1.2.1. This graph illustrates the combinations of two goods the economy can produce with the available resources and technology
1.2.2. The Production Possibilities Frontier (PPF)
1.2.3. The PPF and Opportunity cost
1.2.4. The PPF and Economic Growth
1.2.5. The Shape of the PPF
1.2.5.1. The PPF could be a straight line or bow-shaped
1.2.5.2. The PPF could be bow shaped because of the shifting resources from one good to another
2. Scarcity
2.1. The management of society's resources is important because resources are scarce
2.2. Resources are scarce and wants are unlimited
2.3. Resources are allocated through the combined actions of millions of households and firms
3. Principles
3.1. Principle 1: People face trade-offs
3.1.1. Example: Going to a party the night before your midterm leaves less time for studying.
3.1.2. “There ain’t no such thing as a free lunch."
3.1.3. The more a society spends on national defense (guns), the less it can spend on goods (butter) to raise standard of living of people.
3.1.4. Efficiency vs. Equality
3.1.4.1. Efficiency: when society gets the most from its scarce resources
3.1.4.2. Equality: when prosperity is distributed uniformly among society’s members
3.2. Principle 2: The Cost of Something Is What You Give Up to Get It
3.2.1. Example: Going to college prevents you from earning from a job
3.2.2. Opportunity cost
3.2.2.1. The opportunity cost of any item is whatever must be given up to obtain it. It is the relevant cost for decision making.
3.2.2.2. The opportunity cost of seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater.
3.3. Example: When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education.
3.4. Principle 3: Rational People Think at the Margin
3.4.1. Economics assume that people are generally rational
3.4.2. Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action.
3.4.3. Rational people often make decisions by comparing marginal benefits and marginal costs.
3.5. Principle 4: People Respond to Incentives
3.5.1. Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment.
3.5.2. Rational people respond to incentives
3.5.3. Example: when the price of an apple rises, people decide to eat fewer apples. At the same time, apple orchards decide to hire more workers and harvest more apples.
3.6. Principle 5: Trade Can Make Everyone Better Off
3.6.1. With Trade people can specialize in producing goods and exchange them for other goods.
3.6.2. Countries also benefit from trade and specialization
3.6.2.1. Get a better price abroad for goods they produce
3.6.2.2. Buy other goods more cheaply from abroad than could be produced at home
3.7. Principle 6: Markets Are Usually A Good Way to Organize Economic Activity
3.7.1. Market: a group of buyers and sellers (need not be in a single location)
3.7.2. In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households.
3.7.2.1. Firms decide whom to hire and what to make.
3.7.2.2. Households decide which firms to work for and what to buy with their incomes.
3.8. Principle 7: Governments Can Sometimes Improve Market Outcomes
3.8.1. Important role for govt: enforce property rights (with police, courts)
3.8.1.1. People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen.
3.8.2. Market failure: when the market fails to allocate society’s resources efficiently
3.8.2.1. Causes for Market Failure
3.8.2.1.1. Externalities, when the production or consumption of a good affects bystanders (e.g. pollution)
3.8.2.1.2. Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly)
3.9. Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services
3.9.1. The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor.
3.9.2. Productivity depends on the equipment, skills, and technology available to workers
3.9.3. Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards