Ten Principles of Economics - Part 2. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 13 In the 1980s and 1990s for example much debate in the United States centered on the government s budget deficit the excess of government spending over government revenue. As we will see concern over the budget deficit was based largely on its adverse impact on productivity. When the government needs to finance a budget deficit it does so by borrowing in financial markets much as a student might borrow to finance a college education or a firm might borrow to finance a new factory. As the government borrows to finance its deficit therefore it reduces the quantity of funds available for other borrowers. The budget deficit thereby reduces investment both in human capital the student s education and physical capital the firm s factory . Because lower investment today means lower productivity in the future government budget deficits are generally thought to depress growth in living standards. PRINCIPLE 9 PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY In Germany in January 1921 a daily newspaper cost marks. Less than two years later in November 1922 the same newspaper cost 70 000 000 marks. All other prices in the economy rose by similar amounts. This episode is one of history s most spectacular examples of inflation an increase in the overall level of prices in the economy. Although the United States has never experienced inflation even close to that in Germany in the 1920s inflation has at times been an economic problem. During the 1970s for instance the overall level of prices more than doubled and President Gerald Ford called inflation public enemy number one. By contrast inflation in the 1990s was about 3 percent per year at this rate it would take more than inflation an increase in the overall level of prices in the economy Well it may have been 68 cents when you got in line but it s 74 cents now 14 PART ONE INTRODUCTION Phillips curve a curve that shows the short-run tradeoff between inflation and unemployment 20
