Fundamentals of Economics. Доловова Н.Н - 7 стр.

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7
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LESSON 1
Principle #1: People Face Tradeoffs
How People Make Decisions
There is no mystery to what an “economy” is. Whether we are talking about
the economy of Los Angeles, of the United States, or of the whole world, an
economy is just a group of people interacting with one another as they go about their
lives. Because the behavior of an economy reflects the behavior of the individuals
who make up the economy, we start our study of economics with ten principles of
economics or four principles of individual decisionmaking.
The first lesson about making decis ions is summarized in the adage: "There is
no such thing as a free lunch." To get one thing that we like, we usually have to give
up another thing that we like. Making decisions requires trading off one goal against
another.
Consider a student who must decide how to allocate her most valuable
resource—her time. She can spend all of her time studying economics; she can spend
all her time studying psychology; or she can divide her time between the two fields.
For every hour she studies one subject, she gives up an hour she could have used
studying the other. And for every hour she spends studying, she gives up an hour that
she could have spent napping, bike riding, watching TV, or working at her part-time
job for some extra spending money.
Or consider parents deciding how to spend their family income. They can buy
food, clothing, or a family vacation. Or they can save some of the family income for
retirement or the children's college education. When they choose to spend an extra
dollar on one of these goods, they have one less dollar to spend on some other good.
When people are grouped into societies, they face different kinds of tradeoffs.
The classic tradeoff is between "guns and butter.'' The more we spend on national
defense to protect our shores from foreign aggressors (guns), the less we can spend
on personal goods to raise our standard of living at home (butter). Also important in
modern society is the tradeoff between a clean environment and a high level of
income. Laws that require firms to reduce pollution raise the cost of producing goods
and services. Because of the higher costs, these firms end up earning smaller profits,
paying lower wages, charging higher prices, or some combination of these three.
Thus, while pollution regulations give us the benefit of a cleaner environment and the
improved health that comes with it, they have the cost of reducing the incomes of the
firms' owners, workers, and customers.
Another tradeoff society faces is 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. In
other words, efficiency refers to the size of the economic pie, and equity refers to
how the pie is divided. Often, when government policies are being designed, these
two goals conflict.

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