Principles of Economics

2/14/2011

TEN PRINCIPLES OF ECONOMICS

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ECONOMICS VS. ECONOMY

Economics is the study of how society manages

its scarce resources.

Economy is the system or range of economic

activity

activity in a country, region, or community.

region or

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WHAT ECONOMICS IS ALL ABOUT

Scarcity: the limited nature of society’s

resources

Economics: the study of how society manages

its scarce resources, e.g.

how people decide what to buy,

how much to work, save, and spend

how firms decide how much to produce,

how many workers to hire

how society decides how to divide its resources

between national defense, consumer goods, protecting

the environment, and other needs

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Economic Agents

Households

Firms

Government

ROW (Rest of the World)

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THE CIRCULAR-FLOW DIAGRAM (A SIMPLE CLOSED

G&S

sold

Markets for

Goods &

Services

Factors of

production

Wages, rent,

profit

G&S

bought

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Firms

Spending

THINKING LIKE AN

ECONOMIST

Revenue

ECONOMY.)

Households

Households

Markets for

Factors of

Production

Labor, land,

capital

Income

The Circular-Flow Diagram ( Open economy with a

government.)

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THE PRINCIPLES OF

HOW PEOPLE

MAKE DECISIONS

Decisions… Decisions…

Economic agents face many decisions:

Who will work?

What to produce

How many to produce

What resources to use?

What price to charge?

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HOW PEOPLE MAKE DECISIONS

Principle #1: People Face Tradeoffs

“The best things in life are free,” or are they?

“There is no such thing as a free lunch!”

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HOW PEOPLE MAKE DECISIONS

Principle #1: People Face Tradeoffs

All decisions involve tradeoffs. Examples:

Going to a party the night before your midterm

leaves less time for studying.

Having more money to buy stuff requires

working longer hours, which leaves less time for

leisure.

Protecting the environment requires resources

that could otherwise be used to produce

consumer goods.

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