- People face tradeoffs.
There is no such thing as a free lunch. To get one thing that you like, you usually have to give up another thing that you like. Society also faces tradeoffs such as one between efficiency and equity. Efficiency means that society is getting the most it can from its scarce resources. Equity means that the benefits of those resources are distributed fairly among society’s members. Efficiency and equity are commonly contradictory. For example, if income tax is raised by policy, this policy have benefit of achieving greater equity, they have a cost in terms of reduced efficiency. As a result, people work less and produce fewer goods because the government redistributes income from the rich to the poor, it reduces the reward for working hard.
- The cost of something is what you give up to get it.
The opportunity cost of an item is what you give up to get that item.
- Rational people think at the margin.
Marginal changes means small incremental adjustments to a plan of action. For example, plan tickets are sold at $500 for a flight, but the airline are willing to sell a ticket to a standby passenger right before it takes off. Because the marginal cost of this is merely the cost of the bag of peanuts and can of soda that the extra passenger will consume.
- People respond to incentives.
Because people make decisions by comparing costs and benefits, their behavior may change when the costs or benefits change.
- Trade can make everyone better off.
Trade between two countries is not like a sports contest, where one side wins and the other side loses. It can make each country better off. It is also true between families or other parties.
- Markets are usually a good way to organize economic activity.
Market economy means an economy that allocates resource through the decentralized decisions of many firms and households as they interact in markets for good and services. It is opposite to centrally planned economics in most communist counties. The invisible hand of markets will guide its activity.
- Governments can sometimes improve market outcomes.
There is a situation in which a market left on its own fails to allocate resources efficiently, which is called market failure. One possible cause of market failure is an externality. Another possible cause is market power, for example, monopoly.
- A country’s standard of living depends on its ability to produce goods and services.
Citizens of high-income counties have more TV sets, more cars, better nutrition, better health care, and longer life expectancy that citizens of low-income countries.
- Prices rise when the government prints too much money.
If the growth in the quantity of money is too fast, the value of money falls, and an inflation comes in.
- Society faces a short-run tradeoff between inflation and unemployment.
Prices are said to be sticky in the short run, which mean if government wants to control inflation and reduces the quantity of money in the economy, in the short run, prices will not adjust accordingly. Instead, prices are slow to adjust. Imagine you get less money and prices don’t decline, what will you do? Stop buying things. Then firms make less money so they will lay off peoples. Until prices fall and people buy things as they use to be, then firms will again hire more people.
Principles of Macroeconomics