Chapter Summary

Chapter Summary

Section 1: What Is Economics About?

Presselect/Alamy

Economics is the study of how individuals, firms, and societies make decisions to improve their well-being given limitations.

Imageplus/Corbis



Scarcity is the idea that people have unlimited wants but limited resources. Resources can be money, time, ability, work ethic, or anything that can be used to generate productive outcomes.

Scarce versus scarcity: Large uncut diamonds are scarce—only a few are found in the world each year—and are sold for millions of dollars each. A car, on the other hand, is less scarce, as car dealerships around the country have lots full of them. But both large diamonds and cars are subject to scarcity—many people want them, but can only buy what they can afford.

hello

What Is the Difference Between Microeconomics and Macroeconomics?

Fernando Jose Vascocelos Soares/Dreamstime.com



  • M“i”croeconomics deals with individual entities, such as individuals, firms, and industries (Remember “i” = “individual”)
  • M“a”croeconomics deals with aggregate entities, such as cities or the nation (Remember “a” = “aggregate” or “all”)
How governments deal with pollution is an important problem that can be addressed using economic analysis.
age fotostock/SuperStock



Economists and policymakers often confront the tradeoff between efficiency and equity. Efficiency reflects how well resources are used and allocated. Equity (or fairness) of an outcome is a subjective matter, where differences of opinion exist.





Economic analysis uses a stylized approach, where models boil issues and facts down to their basic relevant elements. To build models means that we make use of the ceteris paribus assumption and hold some important variables constant. This useful device often provides surprising insights about economic behavior.

15

Section 2: Key Principles of Economics

“We should have done something different this weekend…”.
Randy Faris/Corbis

1. Economics Is Concerned with Making Choices with Limited Resources

Economics involves making decisions to maximize one’s well-being, which can come from many sources, including money, time, happiness, or a fortuitous event.

2. When Making Decisions, One Must Take Into Account Tradeoffs and Opportunity Costs

Rewarding the top salesperson in the company creates a valuable incentive to work hard.
Randy Faris/Corbis

Choice and scarcity force tradeoffs because we face unlimited wants but limited resources. We must make tradeoffs in nearly everything we do. Opportunity costs are resources (e.g., time and money) that could be used in another activity. Everything we do involves opportunity costs, the value of the next best alternative use of our resources.

3. Specialization Leads to Gains for All Involved

Specializing in tasks in which one is comparatively better at doing than another allows individuals to achieve productivity gains as long as the work is shared in a mutually beneficial manner.

4. People Respond to Incentives, Both Good and Bad

Maximizing your food intake at a buffet is not thinking at the margin if you end up bloated from overeating.
Julia Shin at Foodographer.net

Incentives encourage people to work hard and be more productive.

5. Rational Behavior Requires Thinking on the Margin

When making a decision involving benefits and costs, one should continue to consume or produce as long as the marginal (additional) benefit exceeds the marginal (additional) cost.

6. Markets Are Generally Efficient; When They Aren’t, Government Can Sometimes Correct the Failure

Market equilibrium often is achieved by letting market participants make decisions freely.
Henrik Jonsson/iStockphoto

Markets bring buyers and sellers together. Competition forces firms to provide products at the lowest possible price. New products are introduced to the market and old products disappear. This dynamism makes markets efficient. In some instances though, markets might fail, such as in dealing with pollution, leading governments to intervene. During extended economic downturns, government can smooth fluctuations in the overall economy.

7. Institutions and Human Creativity Help Explain the Wealth of Nations

Institutions include the legal system, laws and policies, a government free of corruption, and a strong monetary system. Ideas and innovation lead to new products and improve on existing ones, raising the standard of living of all residents.

16