7 principles of Economics

Unit 1, Chapter 1

Economic Fundamentals

1. Scarcity Forces Tradeoffs We want a lot of things

FoodClean waterFully stocked stores

But resources are limitedLimited number of farms producing foodLimited capacity to treat waterStore run out of popular items

So we have to make choices or tradeoffs.

Which house can you afford?

Everyday we make choices or tradeoffs.

Stay home

OR

Come to School

2. Trade makes people better off Trade is the exchange of one item for

another Today we “trade” money for most of

life’s necessities instead of producing them for ourselves

Fair Trade – hot issue in US

3. Markets Coordinate Trade Market is anyplace where buyers and

sellers come together, either in a store or online

Free market = buyers and sellers trade until both are satisfied (with sales and purchases)

Farmers Market

Stock Market

4. Costs versus benefits

We make choices by comparing costs to benefits

Costs = loss of money, time, effort Benefits = gains in money, time,

experience

5. Thinking on the Margin Marginal benefit = what you gain by

adding more one unit of something (clothing, piece of pie)

6. Incentives Matter

Incentive – encourages person to chose to act one way or another

Positive incentives = points, grades, lower

Negative incentives = jail time, fines

7. Future Consequences Count Today’s decision or choice effects

tomorrow Law of unintended consequences =

people and governments can act in ways that have consequences that were not expected or predicted.

Unintended Consequences