Reading notes--Principles of Economics (chapter1)

2021-07-05

Word count: 884 | Reading time≈ 5 min

Summary

Chapter 1 is Ten Principles of Economics. These 10 principles can be divided into three parts and I write some examples to explain them.

How People Make Decisions

1.People face trade-offs.

2.The cost of something is what you give up to get it.

These two principles explain opportunity cost (the next best alternative forgone for an economic decision). Why we should use this concept? Here is an example about considering the cost of studying in a university. Some people may calculate the cost like tuition fee and meal fee. However, it is wrong because you still need to use meal fee for meals if you don’t go to a university. Besides, you don’t calculate your cost of time.

3.Rational people think at the margin.

Margin change means a small incremental adjustment to a plan of action. For instance, if a plane ticket costs 500 dollars, it should sell a ticket with the price greater than 500 dollars to earn profits. However, if there is a free seat and no one would reserve it, it could be sold with the price smaller than 500. Why? Because in this case, the marginal benefit is the price of that ticket, and the marginal cost is the oil used by plane to carry one more passenger (it could be ignored). In other words, it is profitable when the marginal benefit is greater than the marginal cost.

4.People respond to incentives.

e.g The law of demand. (The higher the price, the lower the quantity demanded and vice versa.) People respond to incentives so they could get more profits.

How people interact

5.Trade can make everyone better off.

Because countries can specialize in what they are good at. In other words, producing goods with the lowest opportunity cost.

6.Markets are usually a good way to organize economics activity.

7.Governments can sometimes improve market outcomes.

These two principles explain mixed economies and introduce the invisible hand–market, which can allocate resources efficiently.

How the Economy as a Whole Works

8.A country’s standard of living depends in its ability to produce goods and services.

9.Prices rise when the government prints too much money.

10.Society faces a short-run trade-off between inflation and unemployment.

Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.
Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services.
More hiring means lower unemployment.

###Definitions

Scarcity– the limited nature of society’s resources
Economics– the study of how society manages its scarce resources
Efficiency– the property of society getting the most it can from its scarce resources
Equality– the property of distributing economic prosperity uniformly among the members of society
Opportunity cost– whatever must be given up to obtain some item
Rational people– those who systematically and purposefully do the best they can to achieve their objectives
Marginal change– a small incremental adjustment to a plan of action
Incentive– something that induces a person to act
Market economy– an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Property rights– the ability of an individual to own and exercise control over scarce resources
Market failure– a situation in which a market left on its own fails to allocate resources efficiently
Externality– the impact of one person’s actions on the well-being of a bystander
Market power– the ability of a single economic actor(or small group of actors)to have a substantial influence on market prices
Productivity– the quantity of goods and services produced from each unit of labor input
Inflation– an increase in the overall level of prices in the economy
Business cycle– fluctuations in economic activity, such as employment and production

###Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1.Your opportunity cost of going to a movie is_____(Correct answer: C)

a. the price of the ticket

b. the price of the ticket plus the cost of ant soda and popcorn you buy at the theater

c. the total cash expenditure needed to go to the movie plus the value of your time

d. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money

My wrong answer: D

2.Because people respond to incentives,_____(Correct answer: D)

a. policymakers can alter outcomes by changing punishments or rewards

b. policies can have unintended consequences

c. society faces a trade-off between efficiency and equality

d. All of the above

My wrong answer: A

3.Adam Smith’s “invisible hand” refers to_____(Correct answer: D)

a. the subtle and often hidden methods that businesses use to profit at consumers’ expense

b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants

c. the ability of government regulation to benefit consumers even if the consumers are unaware of the regulations

d. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders

My wrong answer: B