Econmoics Basics

Scarce: Insufficient to meet a demand or requirement; short in supply

inflation: A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

Tradeoff: An exchange of one thing in return for another

Incentive:  Something, such as the fear of punishment or the expectation of reward that induces action or motivates effort.

Rational: using reason or logic in thinking out a problem

Better Off: More advantageous or favorable; improved

Opportunity cost:  the benefit that could have been gained from an alternative use of the same resource. The next best alternative to the choice made. Highest valued activity that you give up when you make a choice.

Market Failure: a situation in which a market left on its own fails to allocate resources efficiently

Externality: The impact of one person’s actions on the well being of a bystander

Market Power: The ability of a single economic actor (or small group of actors) to have a substantial influence on market price.

 

Ten Principles of Economics

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How People Make Decisions

• People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another. 
• The Cost of Something is what You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions. 
• Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. 
• People Respond to Incentives. Behavior changes when costs or benefits change.  

How the Economy Works as a Whole

• Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services. 
• Markets Are Usually a Good Way to Organize Economic Activity. Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government. 
• Governments Can Sometimes Improve Market Outcomes. When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution. 

How People Interact

• A Country's Standard of Living Depends on Its Ability to Produce Goods and Services. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income.
• Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. 
• Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.