PEco Module 1

• Economics addresses the questions of how people make decisions, interact, and how the economy as a whole works.
• Resources are scarce, meaning society has limited resources and cannot produce all the goods and services people wish to have.
• Economics is the study of how society manages its scarce resources.
• Productivity is the ultimate source of living standards.
• Trade and interdependence can be mutually beneficial.
• Society faces a short-run trade-off between inflation and unemployment.
• Growth in the quantity of money is the ultimate source of inflation.
• The government can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality.
• Markets are usually a good way of coordinating economic activity among people.
• Economists study 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, and how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs.
• Principle 1: People face trade-offs, meaning they have to give up something to get something else.
• Society faces trade-offs, meaning it has to give up something to get something else.
• Principle 2: The cost of something is what you give up to get it, meaning the opportunity cost of something is what must be given up to obtain it.
• Principle 3: Rational people think at the margin, meaning they make decisions by evaluating costs and benefits of marginal changes, which are small incremental adjustments to a plan of action.
• Market power is a source of market failure when a single buyer or seller has substantial influence on market price, like a monopoly.
• Society faces a short-run trade-off between inflation and unemployment.
• Prices rise when the government prints too much money.
• Productivity is the most important determinant of living standards, measured by the quantity of goods and services produced from each unit of labor input.
• Society faces a short-run trade-off between inflation and unemployment over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.
• The faster the government creates money, the greater the inflation rate.
• Rational people make decisions by comparing marginal costs and marginal benefits.
• Government can use tax or welfare policies to change how the economic “pie” is divided.
• Inflation is an increase in the overall level of prices in the economy.
• People face trade-offs among alternative goals.
• The cost of any action is measured in terms of forgone opportunities.
• People change their behavior in response to the incentives they face.
• Externalities are a source of market failure when the production or consumption of a good affects bystanders, like pollution.
• Inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall.
• Government can promote efficiency by avoiding market failures, such as externalities and market power.
• Other factors can make this tradeoff more or less favorable, but the tradeoff is always present.
• Government can sometimes improve market outcomes by promoting equality and avoiding disparities in economic wellbeing.
• A country’s standard of living depends on its ability to produce goods and services.
• Incentive is something that influences a person to act.
• Countries benefit from trade and specialization.
• Invisible hand: Prices guide self-interested households and firms to make decisions that maximize society’s economic well-being.
• People can buy a greater variety of goods and services at lower cost.
• You are selling your 2007 Mustang, which has already cost $1,000 in repairs.
• Adam Smith’s famous insight in The Wealth of Nations (1776) is that each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being.
• Market economy allocates resources through decentralized decisions of many firms and households as they interact in markets.
• People are less inclined to work, produce, invest, or purchase if there is a large risk of their property being stolen.