Name ______________________________________________ LECTURE NOTES

Principles of Microeconomics Dr. Sauer

Chapter 1: 10 Principles of Economics I. What is economics? Economics is the study of the ___________________________________ which have alternative uses. What do we mean by scarce? Human desires ____________________ our resources. What do we mean by resources? time, money, fresh water, your skills What do we mean by alternate uses? What are 3 things you could spend your time on? What are 3 things you could spend your money on? What are 3 careers you could pursue that would utilize your skills?

Economics studies the ___________________________ of the decisions that are made about the _____________________________________________. Decisions are made by Individuals groups firms governments _________economics focuses on the decision making of economic actors (e.g. consumers, producers). _________economics focuses on economy-wide phenomena (e.g. unemployment). II. 10 Basic Principles of Economics A. How People Make Decisions Principle #1 People Face __________________________ Infinite options for spending your time but time is scarce you face tradeoffs. Infinite options for spending your money but money is scarce you face tradeoffs. Think of a tradeoff that you recently faced. What were the options you were deciding between? Why did you go with the option you chose?

Recognizing that people face trade-offs ______________________________ tell us what decisions they will or should make. A common tradeoff for society is between efficiency and equity. efficiency = _______________________________ out of a scarce resource equity = ______________________________ resources

________________________________________________ Principle #2: The Cost of Something is What You Give Up To Get It Because people face trade-offs, making decisions requires ___________________________________ of alternative courses of action. Costs are ______________________________________ in nature. The _______________________________ of an item/action includes any money cost as well as any forgone opportunities. What is your personal opportunity cost of being in class today?

What is the opportunity cost of a college education?

What is the opportunity cost of spending tax dollars on national health care?

_____________________________________________ Principle #3: Rational People Think at the _______________________ __________________________ means only doing things when the benefits outweigh the costs. Rational people know that ________________________ in life are rarely black and white but usually involve ________________________. The term _____________________ is used to describe small incremental adjustments to an existing plan of action. (decisions are rarely all-or-nothing) While you are studying for an economics exam, you decide whether or not to study another hour. marginal benefit vs marginal cost While you are at a party, you decide whether or not to stay for a bit longer. marginal benefit vs marginal cost __________________________________ Principle #4: People Respond to Incentives An ________________________ is something that ________________________________ - the prospect of a punishment - the prospect of a reward 2

Why do we tax cigarettes?

Why do parents often give their kids allowances?

Why must I give exams and homework in this class instead of inviting you to learn the material on your honor?

___________________________________________________________________________________ B. How People Interact Principle #5: Trade Can Make Everyone Better Off _______________________ economies are based on the concepts of specialization and trade. At the _____________________ level, we specialize in a ______________, get paid to do it, and trade the money to buy other things. ___________________ specialize in the production of ______________________ and purchase the inputs needed. Trade allows _________________________ to specialize in what they do best and to enjoy a greater variety of goods and services Example: Your roommate is a better cook than you are. You are an adequate cook but a way faster cleaner than your roommate. Explain how specialization and trade could make you both better off.

Share your intended majors/careers with each other. Explain how this is a form of specialization and how you will be trading to get the other things you want in life.

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Principle #6: Markets are Usually a Good Way to Organize Economic Activity ___________________________countries worked on the premise that ____________________officials were in the best position to ___________________ the economy's scarce resources. Government decides: -what goods and services were produced - how much was produced - who produced and consumed these goods and services In a ______________________________, the decisions of a central planner are replaced by the decisions of _______________________________________. Government is still needed in a market economy. ____________________________________________________________ Principle #7: Governments Can Sometimes _______________ Market Outcomes The invisible hand can work its magic only if the government enforces the _____________ and maintains the ________________________ that are key to a market economy. - property rights, sound currency, justice system Also, the market ___________________________ in all situations: 1. externalities (impact of one person's actions on the well-being of a bystander) 2. non-profitable goods 3. concentrated market power ____________________________________________________________________________________ C. How the Economy as a Whole Works Principle # 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services Almost all variation in living standards is attributable to differences in countries' productivity. - amount of goods and services produced from each unit of labor input

Principle #9: Prices Rise When the Government Prints Too Much Money In almost all cases of large or persistent inflation, the culprit is growth in the quantity of money. When a government creates large quantities of the nation's money, the value of the money falls.

Principle #10: Society Faces a Short-Run Trade-off between Inflation and Unemployment Over the short run, many economic policies push inflation and unemployment in opposite directions. This short-run trade-off plays a key role in the analysis of the business cycle.