Economics Principles Chapter Overview

First Principles of Economics

• Economics textbook by Paul Krugman and Robin Wells, sixth edition, published 2021 by Worth Publishers
• The book is revised by Vitaly Terekhov

What You Will Learn in This Chapter

• Four principles guiding individual choices
• Four principles governing how individual choices interact
• Three principles illustrating economy-wide interactions

The Principles: Individual Choice, Part 1

• Choices are necessary due to scarce resources

• Resource: anything usable for producing something else

• Scarcity: a resource's lack of availability to satisfy all societal needs

• Scarce resources include: minerals, lumber, petroleum, time, human skills, clean air, and clean water

The Principles: Individual Choice, Part 2

• Opportunity cost: the value of the next best alternative forgone
• Mark Zuckerberg's decision to drop out of Harvard exemplifies opportunity cost

The Principles: Individual Choice, Part 3

• Decisions often involve trade-offs, comparing costs and benefits
• Marginal decisions focus on "how much" – whether to do a little more or less of something
• Marginal analysis studies marginal decisions

The Principles: Individual Choice, Part 4

• Marginal decision: a decision made at the margins of an activity (e.g., studying a bit more or less)
• Marginal analysis: the study of marginal decisions

The Principles: Individual Choice, Part 5

• People respond to incentives
• Incentive: anything offering rewards for behavior change
• Example: policies to reduce pollution, choosing between education or financial reward

Learn by Doing: Practice Question 1

• Costco offers free samples; customers eat until full. Do they face opportunity cost?
  • Answer: Yes

Learn by Doing: Practice Question 2

• Costco offers free samples; economists label this as an example of
  • Answer: Bad Incentives

The Principles: Interaction of Individual Choices, Part 1

• Gains from trade arise from specialization
• Specialization: each person focuses on tasks they excel at

The Principles: Interaction of Individual Choices, Part 2

• Markets typically move toward equilibrium
• Equilibrium: an economic state where no individual benefits from changing their actions

The Principles: Interaction of Individual Choices, Part 3

• Resources should be used efficiently for achieving societal goals
• Efficiency: opportunities to benefit people without worsening others' situations

The Principles: Interaction of Individual Choices, Part 4

• Equity: everyone gets a fair share; a condition
• Markets typically lead to efficiency, but intervention can improve societal welfare in cases of market failure

Learn by Doing: Practice Question 3

• Fast-food chains' task division (e.g., taking orders, preparing food, bagging) is an illustration of
• Answer: Specialization

Learn by Doing: Practice Question 4

• Low-skilled workers earning below poverty line is considered a failure related to
  • Answer: Inequity

The Principles: Economy-Wide Interactions, Part 1

• One person's spending is another's income
• Recessions: decrease in business spending, less income, less spending leading to layoffs, rising unemployment

The Principles: Economy-Wide Interactions, Part 2

• Overall spending can deviate from the economy's productive capacity
• Government policy can influence spending to address these imbalances (e.g., recessions or inflation)

The Principles: Economy-Wide Interactions, Part 3

• Increased economic potential leads to economic growth over time
• Economic growth: increase in living standards over time
• Economy's potential: total goods/services it could produce
• Factors boosting potential: new technologies, availability of resources
• Disparities in growth impacts: uneven distribution for different groups

Learn by Doing: Discussion Question 1

• Wealthy people (like Oprah Winfrey and Jeff Bezos) still face scarcity

Explore the fundamental principles of economics as outlined in the textbook by Krugman and Wells. This quiz delves into the four guiding principles of individual choices and their interactions, along with key concepts such as scarcity and opportunity cost. Test your knowledge on how these economic principles shape decision-making.