Economics Principles: Costs and Trade-offs

The Cost of Something

• The cost of something you want is what you give up to get it.
• You must consider the opportunity cost when making a decision.
• The opportunity cost is the best alternative you forgo when making a choice.
• The opportunity cost of going to college is more than just tuition, books, and fees; it also includes the wages you would have earned if you had worked.
• The opportunity cost of seeing a film is more than just the ticket price; it also includes the value of the time you spend in the theater.

Rational People Think at the Margin

• Rational individuals strive to achieve their goals in a systematic and deliberate manner.
• To do so, they compare the marginal costs and benefits of their actions.
• Marginal cost is the cost of producing one more unit, while marginal benefit is the additional benefit received by consuming one more unit.

People Face Trade-offs

• Society and individuals face trade-offs because resources are scarce.
• To obtain something desirable, you must give up something else.

Trade Can Make Everyone Better Off

• People benefit from trade because it allows them to specialize in their areas of expertise and exchange goods and services for others.
• Trade enables a wider variety of goods and services to be consumed at lower costs.
• Countries can benefit from trade, obtaining better prices for their exports and acquiring goods more cheaply from abroad.

Markets Are Usually a Good Way to Organize Economic Activity

• A market is a group of buyers and sellers who interact.
• Markets organize economic activity by determining what goods to produce, how to produce them, how much of each to produce, and who receives them.
• The price system serves as a key mechanism for allocating resources and determining production and consumption patterns.

Governments Can Sometimes Improve Market Outcomes

• One role of government is to promote efficiency by addressing market failures and ensuring a fair distribution of economic well-being.
• Market failures occur when the market, left to its own devices, fails to allocate resources efficiently, such as in cases of externalities or market power.
• Externalities arise when the production or consumption of a good affects bystanders, such as pollution.
• Market power exists when a single buyer or seller has significant influence over the market price, such as in a monopoly.
• Governments can use policy tools like taxes, subsidies, regulations, and social welfare programs to address market failures and promote equity.

Prices Rise When the Government Prints Too Much Money

• Inflation refers to a general increase in the price level.
• In the long run, inflation is almost always caused by excessive growth in the quantity of money, which decreases the value of money.
• The faster the government prints money, the higher the inflation rate.

Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

• In the short term (one to two years), many economic policies push inflation and unemployment in opposite directions.
• This known as the short-term Phillips Curve.
• The extent of this relationship can vary due to other factors, but the tradeoff remains constant.