Chapter 1 Econ

Theory of Comparative Advantage

says that when people or nations specialize in goods in which they have a low opportunity cost, they can trade to mutual advantage

When markets work well...

self-interest ends up promoting social interest

Big Idea Seven: Institutions Matter

Among the most powerful institutions for supporting good incentives are property rights, political stability, honest government, a dependable legal system, and competitive and open markets.

Big Idea One: Incentives Matter

Economists do think that people respond in predictable ways to incentives of all kinds. Fame, power, reputation, sex, and love are all important incentives. Economists even think that benevolence responds to incentives.

The concept of opportunity cost is important for two reasons

First, if you don't understand the opportunities you are losing when you make a choice, you won't recognize the real trade-offs that you face. Recognizing trade-offs is the first step in making wise choices. Second, most of the time people do respond to changes in opportunity costs—even when money costs have not changed—so if you want to understand behavior, you need to understand opportunity cost.

Big Idea Nine: Inflation Is Caused by Increases in the Supply of Money

Inflation, one of the most common problems in macroeconomics, refers to an increase in the general level of prices make it harder for people to figure out the real values of goods, services, and investments Inflation is caused by a sustained increase in the supply of money.

Markets do not always align self-interest with the social interest.

Market incentives can be too strong or too weak

We survive and Prosper because...

Specialization increases productivity

Big Idea Ten: Central Banking Is a Hard Job

The Federal Reserve has to make tough decisions that either positively or negatively impact the future economy The Federal Reserve is a highly fallible institution that faces a very difficult job

Big Idea Five: Trade Makes People Better Off

The benefits of trade, however, go beyond those of exchange. The real power of trade is the power to increase production through specialization.

One of the most surprising discoveries of economic science

The idea that the pursuit of self-interest can be in the social interest—that at least sometimes, "greed is good"

Big Idea Three: Trade-offs Are Everywhere

The inevitability of trade-offs is the consequence of a big fact about the world, scarcity. We face trade-offs because we don't have enough resources to satisfy all of our wants—more of this means less of that.

Big Idea Four: Think on the Margin

Thinking on the margin is just making choices by thinking in terms of marginal benefits and marginal costs, the benefits and costs of a little bit more (or a little bit less) useful for understanding how consumers and producers make decisions

Big Idea Two: Good Institutions Align Self-Interest with the Social Interest

When self-interest aligns with the broader public interest, we get good outcomes, but when self-interest and the social interest are at odds, we get bad outcomes, sometimes even cruel and inhumane outcomes

wealth matters

and understanding economic growth is one of the most important tasks of economics.

When markets don't properly align self-interest with the social interest

government can sometimes improve the situation by changing incentives with taxes, subsidies, or other regulations.

The great economic problem

how to arrange our scarce resources to satisfy as many of our wants as possible.

Division of Knowledge equals

increase in total knowledge and productivity

Big Idea Eight: Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

no economy grows at a constant pace Economies advance and recede, rise and fall, boom and bust Although some booms and busts are part of the normal response of an economy to changing economic conditions, not all booms and busts are normal A significant task of macroeconomic theory is to understand both the promise and the limits of monetary and fiscal policy in smoothing out the normal booms and busts of the macroeconomy.

Wealth brings

opportunities, possibilities, freedom, and happiness

Economics of scale

reduction in costs created when goods are mass produced

marginal cost

the additional cost from producing a little bit more

marginal revenue

the additional revenue from producing a little bit more

marginal tax rates

the tax rate on an additional dollar of income

Opportunity Cost

the value of the opportunities lost

Big Idea Six: Wealth and Economic Growth Are Important

wealth comes from economic growth