CHAPTER 1 TEN PRINCIPLES OF ECONOMICS side wins and the other side loses. In fact, the opposite is true: Trade between two THE WALL STREE了 JOU RNAL countries can make each country better off To see why, consider how trade affects your family. When a member of your family looks for a job, he or she competes against members of other families who are looking for jobs. Families also compete against one another when they go shopping, because each family wants to buy the best goods at the lowest prices. So, in a sense, each family in the economy is competing with all other families make its own clothes, and build its own home. Clearly, your family gains ucs Despite this competition, your family would not be better off isolating itself from all other families. If it did, your family would need to grow its own food, from its ability to trade with others. Trade allows each person to specialize in the activities he or she does best, whether it is farming, sewing, or home building. By trading with others, people can buy a greater variety of goods and services at lower cost Countries as well as families benefit from the ability to trade with one another Trade allows countries to specialize in what they do best and to enjoy a greater va- riety of goods and services. The Japanese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they are our "For $5 a week you can watch competitors baseball without being nagged te cut the gra PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY The collapse of communism in the Soviet Union and Eastern Europe may be the most important change in the world during the past half century. Communist countries worked on the premise that central planners in the government were in the best position to guide economic activity. These planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well-being for the country as a whole Today, most countries that once had centrally planned economies have aban- doned this system and are trying to develop market economies. In a market econ- market economy omy, the decisions of a central planner are replaced by the decisions of millions of an economy that allocates resources firms and households. Firms decide whom to hire and what to make Households through the decentralized decide which firms to work for and what to buy with their incomes. These firms of many firms and households as and households interact in the marketplace, where prices and self-interest guide they interact in markets for good their decisions At first glance, the success of market economies is puzzling. After ket economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services,and all of them are interested primarily in their own well-being. Yet, despite decentralized decisionmaking and self-interested decisionmakers, market economies have proven remarkably successful in organizing economic activity in a way that promotes overall economic well-being In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist adam smith made the most famous observation in all of economics Households and firms interacting in markets act as if they are guided by an"in- visible hand" that leads them to desirable market outcomes. One of our goals inCHAPTER 1 TEN PRINCIPLES OF ECONOMICS 9 side wins and the other side loses. In fact, the opposite is true: Trade between two countries can make each country better off. To see why, consider how trade affects your family. When a member of your family looks for a job, he or she competes against members of other families who are looking for jobs. Families also compete against one another when they go shopping, because each family wants to buy the best goods at the lowest prices. So, in a sense, each family in the economy is competing with all other families. Despite this competition, your family would not be better off isolating itself from all other families. If it did, your family would need to grow its own food, make its own clothes, and build its own home. Clearly, your family gains much from its ability to trade with others. Trade allows each person to specialize in the activities he or she does best, whether it is farming, sewing, or home building. By trading with others, people can buy a greater variety of goods and services at lower cost. Countries as well as families benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater va￾riety of goods and services. The Japanese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they are our competitors. PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY The collapse of communism in the Soviet Union and Eastern Europe may be the most important change in the world during the past half century. Communist countries worked on the premise that central planners in the government were in the best position to guide economic activity. These planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well-being for the country as a whole. Today, most countries that once had centrally planned economies have aban￾doned this system and are trying to develop market economies. In a market econ￾omy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self-interest guide their decisions. At first glance, the success of market economies is puzzling. After all, in a mar￾ket economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Yet, despite decentralized decisionmaking and self-interested decisionmakers, market economies have proven remarkably successful in organizing economic activity in a way that promotes overall economic well-being. In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith made the most famous observation in all of economics: Households and firms interacting in markets act as if they are guided by an “in￾visible hand” that leads them to desirable market outcomes. One of our goals in “For $5 a week you can watch baseball without being nagged to cut the grass!” market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services