Economic Development
Topic 1: Ten Principles of Economics
TRADE CAN MAKE EVERYONE BETTER OFF.
PRINCIPLE #1 People gain from their ability to trade with one another.
Competition results in gains from trading.
Trade allows people to specialize in what they do best.
PEOPLE FACE TRADEOFFS.
To get one thing, we usually have to give up another thing. PRINCIPLE #6
Guns v. Butter
Food v. Clothing
Leisure time v. Work
MARKETS ARE USUALLY A GOOD WAY TO
Efficiency v. Equity ORGANIZE ECONOMIC ACTIVITY
Efficiency Equity A Market Economy is an economy that allocates
resources through the decentralized decisions of many
means society gets the means the benefits of
firms and households as they interact in markets for
most that it can from its those resources are
goods and services.
scarce resources. distributed fairly among
Households decide what to buy and who to work for.
members of society.
Firms decide who to hire and what to produce.
PRINCIPLE #7
GOVERNMENTS CAN SOMETIMES IMPROVE
MARKET OUTCOMES.
Market Failure occurs when the market fails to allocate
PRINCIPLE #2 resources efficiently.
When the market fails (breaks down) government can
intervene to promote efficiency and equity.
THE COST OF SOMETHING IS WHAT YOU
GIVE UP TO GET IT.
PRINCIPLE #8
Decisions require comparing costs and benefits of
alternatives.
Whether to go to college or to work? THE STANDARD OF LIVING DEPENDS ON A
Whether to study or go out in a date? COUNTRY’S PRODUCTION.
Whether to go to class or sleep in? Standard of living may be measured in different ways:
The opportunity cost of an item is what you give up to
obtain that item.
PRINCIPLE #3
RATIONAL PEOPLE THINK AT THE MARGIN.
Marginal Changes are small, incremental adjustments to
an existing plan of action.
People make decisions by comparing costs and benefits at the
margin.
What does it mean?
It means to think about your next step forward. The word
“marginal” means “additional.” The first glass of lemonade on
a hot day quenches your thirst, but the next glass, maybe not
so much. If you think at the margin, you are thinking about
what the next or additional action means for you.
PRINCIPLE #4
PEOPLE RESPOND TO INCENTIVES
Marginal changes in cost or benefits motive people to
respond.
The decision to choose one alternative over another
occurs when that alternative’s marginal benefits exceed
its marginal costs?
Sales are incentives for consumers to buy, because firms know
consumers generally to lower prices by purchasing more.
PRINCIPLE #5
Daniela Marie Almazar 1
Economic Development
Topic 1: Ten Principles of Economics
By comparing personal incomes.
By comparing the total markets value of a
nation’s production.
Almost all variations in living standards are explained by
difference in countries’ productivities.
Productivity is the amount of goods and services
produced from each hour of a worker’s time.
PRINCIPLE #9
PRICES RISE WHEN THE GOVERNMENT
PRINTS TOO MUCH MONEY
Inflation is an increase in the overall level of prices in the
economy.
One cause of inflation is the growth in the quantity of
money.
PRINCIPLE #10
SOCIETY FACES SHORT-RUN TRADEOFF
BETWEEN INFLATION AND UNEMPLOYMENT
The Philips Curve illustrates the tradeoff between
inflation and unemployment.
Daniela Marie Almazar 2
Economic Development
Topic 1: Ten Principles of Economics
ways:
Daniela Marie Almazar 3
