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Chapter 1: Ten Principles of Economics
1. People face tradeoffs.
Efficiency: means society gets the most that it can from its scarce resources.
Equity: means 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.
Decisions require comparing costs and benefits of alternatives.
Opportunity cost: is what you give up to obtain that item.
Example: The Production Possibilities Frontier
The production possibilities frontier is a graph showing the various
combinations of output that the economy can possibly produce given the
available factors of production and technology.
Concepts Illustrated by the Production Possibilities Frontier : ①Tradeoffs;
②Opportunity Cost; ③Efficiency; ④Economic Growth.
3. Rational people think at the margin.
People make decisions by comparing costs and benefits at the margin.
4. People respond to incentives.
motivate people to respond.
Examples: When gas prices rise, consumers buy more hybrid cars.
1 凌璐 整理
5. Trade can make everyone better off.
Trade allows people to specialize in what they do best.
Countries also benefit from trade specialization.
6. Markets are usually a good way to organize economic activity.
In a market economy, households and firms can decide without guide.
Famous insight by Adam Smith in The Wealth of Nations (1776): households
and firms interact in markets act as if guided by an “invisible hand.”
7. Governments can sometimes improve market outcomes.
When the market fails (breaks down), government can intervene to promote
efficiency and equity.
Market failure: occurs when the market fails to allocate resources efficiently.
(1) may be caused by an externality
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