principles

• What does the word "economy" originate from?


  It comes from the Greek word "oikonomos," meaning "one who manages a household."
• What is the primary focus of economics?

  It is the study of how society manages its scarce resources.
• How are resources typically allocated in most societies?

  Through the combined choices of millions of households and firms.
• What is the first principle of economics?

  • Principle 1: People Face Trade-offs
  • To get something we like, we usually have to give up something else.
  • Making decisions requires trading off one goal against another.
• What does the saying "There ain’t no such thing as a free lunch" imply?


  It implies that to obtain something desirable, one must give up something else.
• What is the second principle of economics?

  • Principle 2: The Cost of Something Is What You Give Up to Get It
  • Making decisions requires comparing costs and benefits.
  • The cost of an action may not always be obvious.
• What is the third principle of economics?

  • Principle 3: Rational People Think at the Margin
  • Rational people systematically do the best they can to achieve their objectives.
  • Decisions often involve marginal changes.
• What does the term "marginal change" refer to?

  It refers to a small incremental adjustment to an existing plan of action.
• How do rational people make decisions?

  By comparing marginal benefits and marginal costs.
• What is the fourth principle of economics?

  • Principle 4: People Respond to Incentives
  • An incentive is something that induces a person to act.
  • Rational people compare costs and benefits and respond to incentives.
• What is the fifth principle of economics?

  • Principle 5: Trade Can Make Everyone Better Off
  • Trade between countries can benefit both sides.
  • It is not a zero-sum game like a sports contest.
• What is the sixth principle of economics?

  • Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
  • Decisions are made by millions of firms and households.
  • Prices and self-interest guide decisions in a market economy.
• What do buyers and sellers consider in a market?

  Buyers look at the price to determine demand, and sellers look at the price to decide supply.
• What is the seventh principle of economics?

  • Principle 7: Governments Can Sometimes Improve Market Outcomes
  • Governments enforce rules and maintain institutions key to a market economy.
  • They enforce property rights for resource control.
• What is market failure?


  It refers to a situation where the market fails to produce an efficient allocation of resources.
• What is one cause of market failure?

  An externality, which is the impact of one person’s actions on the well-being of a bystander.
• What is another cause of market failure?


  Market power, which is the ability of a person or firm to influence market prices.
• What is the eighth principle of economics?

  • Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
  • Variation in living standards is due to differences in productivity.
  • Higher productivity leads to a higher standard of living.
• How does productivity affect living standards?

  In nations with high productivity, most people enjoy a high standard of living.
• What is the ninth principle of economics?

  • Principle 9: Prices Rise When the Government Prints Too Much Money
  • Excessive money printing leads to inflation.
  • Inflation is an increase in the overall level of prices.
• What historical example illustrates extreme inflation?


  The cost of a newspaper in Germany rose from 0.30 marks to 70,000,000 marks in less than two years.
• What typically causes inflation?


  Growth in the quantity of money is usually the culprit.
• What happens to the value of money when a government prints large quantities of it?

  The value of the money falls.
• What is the tenth principle of economics?

  • Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
  • Increasing money supply stimulates spending and demand for goods.
  • Higher demand can lead to lower unemployment in the short run.
• What is the short-run effect of increasing the money supply?

  It stimulates overall spending and demand for goods and services.
• What may happen as a result of higher demand in the economy?

  Firms may raise their prices and hire more workers.
• What is the relationship between hiring and unemployment?

  More hiring leads to lower unemployment.