This document discusses key economic concepts related to scarcity, decision-making, and the role of markets and government. It notes that individuals face trade-offs in their decisions and respond to incentives. It also explains that markets are generally an efficient way to organize economic activity, but that government intervention may be needed to address market failures or inequity issues. The document outlines several principles of economics, including opportunity costs, marginal analysis, gains from trade, productivity factors that influence standards of living, and the relationship between inflation, unemployment, and monetary policy in the short-run.

2.  Scarcity and Decisions
Households, firms, society
 Economy
 A group of people interacting with one another as they
go about their lives
 Therefore, behavior of an economy reflects the
behavior of individuals comprising the economy

3. 1. People Face Trade-Offs
 Making decisions requires trading off one goal
against another.
“There is no such thing as a free lunch. To
get something that we like, we have to give
another thing that we like.”
 Equity vs. Efficiency
Efficiency – getting the most that we can from
scarce resources
Equity - distributing economic prosperity
fairly among members of society
Acknowledging life’s trade-offs is important because
people are likely to make good decisions only if they
understand the options available to them.

4. 2. “The Cost of Something is What You Give Up to Get
it.”
 Opportunity Cost – whatever must be given up to get
something
3. Rational People Think at the Margin
 Marginal Changes – small incremental changes to an
existing plan
of action
- changes around the edges of what
one is
doing
 Marginal Benefits vs. Marginal Costs

5. 4. People Respond to Incentives
 People make decisions by comparing costs and
benefits; behavior changes when costs and benefits
change.
 Important in policy formulation: direct and indirect
effects (e.g. rent control)
People alter their behavior in response to changes in
incentives (positive or negative incentives).

6. 5. Trade Can Make Everyone Better Off
 Allows specialization
 Increases welfare
 PPF vs. CPF
 ↑CPF: ↑Quantity & ↑Product Mix or Variety of consumption Goods

7. 6. Markets are Usually a Good Way to Organize
Economic Activity
 Centrally Planned Economy – government organize
economic activity to promote economic well-being of the
country as a whole
 Market Economy - an economy that allocates resources
trhough decentralized decisions of many firms and
households as they interact in the market of goods and
services
• Driven primarily by own well-being
• Households and firms interacting in the market act as if they
were guided by an “invisible hand” that leads them to a
desirable market outcomes
• Pricing Mechanism (Price) – reflect the value of a good to
society and the cost to society of making the good

8. • Because households and firms look at prices when deciding
what to buy and sell, they unknowingly take into account the
social cost and benefits in their action.
• Therefore, prices guide individual decision-makers to reach
outcomes that, in many cases, maximize the welfare of
society as a whole.
Corollary Arguments:
 Central Planners lack the information that gets reflected in
prices when prices are free to respond to market forces.
 Taxes distort prices and thus the decisions of households
and firms.

9. 7. Government Can Sometimes Improve Market
Outcomes
 Market Failure – a situation in which the market left on its
own fails to allocate resources efficiently
• Provision of Public goods
 Externality – the impact of one person’s action on the
well-being of a bystander
 Market Power – the ability of a single economic actor or
small groups of actors to have a substantial influence on
market prices
 Equity Issue – equitable distribution of economic
prosperity

10. 8. A Country’s Standard of Living Depends on Its
Ability to Produce Goods and Services
 Productivity – the quantity of goods and services produced
from each hour’s worker’s time
 education
 tools
 Access to technology
9. Prices Rise When Government Prints Too Much
Money
 Inflation – increase in the overall level of prices in the
economy
 Growth of Money – when government increases the amount
of money, the value of money falls.

11. 10. The Economy Faces a Short-Run Trade-Off between
Inflation and Unemployment.
 Business Cycle – fluctuations in economic activity (e.g. production
and employment
 Philips Curve – a curve that shows the short-run tradeoff between
unemployment and inflation