How People Make Decisions
How People Interact
How the Economy as a Whole Works
To get one thing, we usually have to give up another thing.
People decide whether to do one thing or not by considering its costs and benefits.
However, making decisions requires trading off this thing against other alternatives.
opportunity cost of an item is what you give up to obtain that item.
People make optional decisions by comparing costs and benefits at the margin.
Marginal changes are small, incremental adjustments to an existing plan of action.
Marginal changes in costs or benefits motivate people to respond.
The decision to choose one alternative over another occurs when that alternative's marginal benefits exceed its marginal costs.
People gain from their ability to trade with one another.
Competition results in gains from trading.
Trade allows people to
specialize in what they do best.
market economy, households decide what to buy and who to work for.
Firms decide who to hire and what to produce.
Adam Smith made the observation that
firms interacting in markets act as if guided by an
Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social benefits and costs of their actions.
As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.
Market failure occurs when the market fails to allocate resources efficiently.
Markey failure may by caused by an
externality, which is the impact of one person or firm's actions on
the well-being of a bystander.（不是通过价格来影响）
Market failure may also be caused by
market power, which is the ability of a single person or firm to unduly influence market prices.
Standard of living may be measured in different ways:
By comparing personal incomes.
By comparing the total market value of a nation's production.
Almost all variations in living standards are explained by differences in countries'
Productivity is the amount of goods and services produced from each
hour of a worker's time.（注意是用小时来衡量，因为有些国家假期多，工作时间短。所以用小时来度量）
Inflation is an increase in the
overall level of prices in the economy.
One cause of inflation is the growth in the quantity of money.
Phillips Curve illustrates the tradeoff between inflation and unemployment.
the amount that the government spends,
the amount it taxes, and
the amount of money it prints, policy makers can, in the short run, influence the combination of inflation and unemployment that the economy experiences.