Chapter 1
Principles of Economics
By Boundless
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When scarce resources are used, actors are forced to make choices that have an opportunity cost.
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Individuals face opportunity costs when they choose one course of action over another.
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Individuals will choose the option that yields the greatest net marginal benefit.
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Incentives are ways to encourage or discourage certain behaviors or choices.
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Firms allow an economy to operate more efficiently and reduce the transaction costs of coordinating production.
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Producers and consumers trade because the exchange makes both parties better off.
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An efficient market maximizes total consumer and producer surplus.
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In a free market, the price and quantity of an item are determined by the supply and demand for that item.
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A perfectly competitive market with full property rights is typically efficient.
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Governments can intervene to make a market more efficient when a market failure, such as externalities or asymmetric information, exists.
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Variables that describe the full economy, such as GDP and unemployment, are determined by the decisions of individual economic actors.
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A firm's production outputs are what it creates using its resources: goods or services.
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Labor, capital, and land are the three necessary inputs for any production process.
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The process of producing and distributing a good or service is called a supply chain, and it is composed of many economic actors.
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The key difference between centrally planned and market economies is the degree of individual autonomy.
A mixed economy is a system that embraces elements of centrally planned and free market systems.
Mathematical economics uses mathematical methods, such as algebra and calculus, to represent theories and analyze problems in economics.
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Economists use assumptions in order to simplify economics processes so that they are easier to understand.
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Economics, as a science, follows the scientific method in order to study data, observe patterns, and predict results of stimuli.
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A model is simply a framework that is designed to show complex economic processes.
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Positive economics is defined as the "what is" of economics, while normative economics focuses on the "what ought to be".
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Macroeconomics is the study of the performance, structure, behavior and decision-making of an economy as a whole.
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Microeconomics deals with the economic interactions of a specific person, a single entity or a company; it is the study of markets.
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Microeconomics focuses on individual markets, while macroeconomics focuses on whole economies.