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INTHISCHAPTERYOUWILL...Discusshowincentivesaffectpeople’sbehaviorLearnthemeaningofopportunitycostLearnthateconomicsisabouttheallocationofscarceresourcesExaminesomeofthetradeoffsthatpeoplefaceSeehowtousemarginalreasoningwhenmakingdecisionsThewordeconomycomesfromtheGreekwordfor“onewhomanagesahouse-hold.”Atfirst,thisoriginmightseempeculiar.But,infact,householdsandeconomieshavemuchincommon.Ahouseholdfacesmanydecisions.Itmustdecidewhichmembersofthehouseholddowhichtasksandwhateachmembergetsinreturn:Whocooksdin-ner?Whodoesthelaundry?Whogetstheextradessertatdinner?WhogetstochoosewhatTVshowtowatch?Inshort,thehouseholdmustallocateitsscarcere-sourcesamongitsvariousmembers,takingintoaccounteachmember’sabilities,efforts,anddesires.Likeahousehold,asocietyfacesmanydecisions.Asocietymustdecidewhatjobswillbedoneandwhowilldothem.Itneedssomepeopletogrowfood,otherpeopletomakeclothing,andstillotherstodesigncomputersoftware.Oncesoci-etyhasallocatedpeople(aswellasland,buildings,andmachines)tovariousjobs,TENPRINCIPLESOFECONOMICS3ConsiderwhytradeamongpeopleornationscanbegoodforeveryoneDiscusswhymarketsareagood,butnotperfect,waytoallocateresourcesLearnwhatdeterminessometrendsintheoveralleconomy4PARTONEINTRODUCTIONitmustalsoallocatetheoutputofgoodsandservicesthattheyproduce.Itmustdecidewhowilleatcaviarandwhowilleatpotatoes.ItmustdecidewhowilldriveaPorscheandwhowilltakethebus.Themanagementofsociety’sresourcesisimportantbecauseresourcesarescarce.Scarcitymeansthatsocietyhaslimitedresourcesandthereforecannotpro-duceallthegoodsandservicespeoplewishtohave.Justasahouseholdcannotgiveeverymembereverythingheorshewants,asocietycannotgiveeveryindi-vidualthehigheststandardoflivingtowhichheorshemightaspire.Economicsisthestudyofhowsocietymanagesitsscarceresources.Inmostsocieties,resourcesareallocatednotbyasinglecentralplannerbutthroughthecombinedactionsofmillionsofhouseholdsandfirms.Economiststhereforestudyhowpeoplemakedecisions:howmuchtheywork,whattheybuy,howmuchtheysave,andhowtheyinvesttheirsavings.Economistsalsostudyhowpeopleinter-actwithoneanother.Forinstance,theyexaminehowthemultitudeofbuyersandsellersofagoodtogetherdeterminethepriceatwhichthegoodissoldandthequantitythatissold.Finally,economistsanalyzeforcesandtrendsthataffecttheeconomyasawhole,includingthegrowthinaverageincome,thefractionofthepopulationthatcannotfindwork,andtherateatwhichpricesarerising.Althoughthestudyofeconomicshasmanyfacets,thefieldisunifiedbysev-eralcentralideas.Intherestofthischapter,welookatTenPrinciplesofEconomics.Theseprinciplesrecurthroughoutthisbookandareintroducedheretogiveyouanoverviewofwhateconomicsisallabout.Youcanthinkofthischapterasa“pre-viewofcomingattractions.”HOWPEOPLEMAKEDECISIONSThereisnomysterytowhatan“economy”is.WhetherwearetalkingabouttheeconomyofLosAngeles,oftheUnitedStates,orofthewholeworld,aneconomyisjustagroupofpeopleinteractingwithoneanotherastheygoabouttheirlives.Becausethebehaviorofaneconomyreflectsthebehavioroftheindividualswhomakeuptheeconomy,westartourstudyofeconomicswithfourprinciplesofin-dividualdecisionmaking.PRINCIPLE#1:PEOPLEFACETRADEOFFSThefirstlessonaboutmakingdecisionsissummarizedintheadage:“Thereisnosuchthingasafreelunch.”Togetonethingthatwelike,weusuallyhavetogiveupanotherthingthatwelike.Makingdecisionsrequirestradingoffonegoalagainstanother.Considerastudentwhomustdecidehowtoallocatehermostvaluablere-source—hertime.Shecanspendallofhertimestudyingeconomics;shecanspendallofhertimestudyingpsychology;orshecandividehertimebetweenthetwofields.Foreveryhourshestudiesonesubject,shegivesupanhourshecouldhaveusedstudyingtheother.Andforeveryhourshespendsstudying,shegivesupanhourthatshecouldhavespentnapping,bikeriding,watchingTV,orworkingatherpart-timejobforsomeextraspendingmoney.scarcitythelimitednatureofsociety’sresourceseconomicsthestudyofhowsocietymanagesitsscarceresourcesCHAPTER1TENPRINCIPLESOFECONOMICS5Orconsiderparentsdecidinghowtospendtheirfamilyincome.Theycanbuyfood,clothing,orafamilyvacation.Ortheycansavesomeofthefamilyincomeforretirementorthechildren’scollegeeducation.Whentheychoosetospendanextradollarononeofthesegoods,theyhaveonelessdollartospendonsomeothergood.Whenpeoplearegroupedintosocieties,theyfacedifferentkindsoftradeoffs.Theclassictradeoffisbetween“gunsandbutter.”Themorewespendonnationaldefensetoprotectourshoresfromforeignaggressors(guns),thelesswecanspendonconsumergoodstoraiseourstandardoflivingathome(butter).Alsoimportantinmodernsocietyisthetradeoffbetweenacleanenvironmentandahighlevelofincome.Lawsthatrequirefirmstoreducepollutionraisethecostofproducinggoodsandservices.Becauseofthehighercosts,thesefirmsendupearningsmallerprofits,payinglowerwages,charginghigherprices,orsomecombinationofthesethree.Thus,whilepollutionregulationsgiveusthebenefitofacleanerenviron-mentandtheimprovedhealththatcomeswithit,theyhavethecostofreducingtheincomesofthefirms’owners,workers,andcustomers.Anothertradeoffsocietyfacesisbetweenefficiencyandequity.Efficiencymeansthatsocietyisgettingthemostitcanfromitsscarceresources.Equitymeansthatthebenefitsofthos