How People Make Decisions * An economy is a group of people deal with one another as they go about their lives.
Principle 1: People Face Trade-Offs * Making decisions requires trading off one goal against another. * Efficiency is the property of society getting the most it can from its scarce resources. * Equality is the property of distributing economic prosperity uniformly among the members of society. * People are more likely to make good decisions only if they understand the options they have available.
Principle 2: The Cost of Something is What You Give Up to Get It * Opportunity cost is whatever must be given up to obtain some time.
Principle 3: Rational People Think at the Margin * Rational people are ones who systematically and purposefully do the best they can to achieve their objectives. * Marginal changes are small incremental changes to a plan of action. * Making decisions on the edge of a plan that will furthermore benefit you more then the original plan ever would.
Principle 4: People Respond to Incentives * An incentive is something that encourages a person to act. * Incentives play a center role in the study of economics. * The influence of prices on the behavior of consumers and producers is crucial for how a market economy allocates scarce resources. * When policymakers fail to consider how their policies affect incentives, they often end up with unintended consequences.
Principle 5: Trade Can Make Everyone Better Off * Everyone gains from their ability to trade with others, if there were no competition you would have to grow and provide you own goods for yourself. * Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity * The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well-being for the country as a whole. * Most countries that formally had central planning had abandoned the idea for a market economy, which is, an economy that allocates resources through the decentralized decisions of its firms and households as they interact in markets for goods and services. * Organizations organize who to hire and what to make, who works for them and what to buy with their incomes. * When the government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the decisions of the households and firms that make up the economy.
Principle 7: Governments Can Sometimes Improve Markets Outcome * Property rights are the ability of an individual to own and exercise control over scarce resources. * Government policies aim to either enlarge the economic pie or to change how the pie is divided. * Market failure