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Ten Principles ofTen Principles ofEconomicsEconomics
Ten Principles ofTen Principles ofEconomicsEconomics
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Learn that economics is about theLearn that economics is about theallocation of scarce resources.allocation of scarce resources.
Examine some of the tradeoffs thatExamine some of the tradeoffs that
people face.people face. Learn the meaning of opportunity cost.Learn the meaning of opportunity cost.
See how to use marginal reasoningSee how to use marginal reasoning
when making decisions.when making decisions.
Learn that economics is about theLearn that economics is about theallocation of scarce resources.allocation of scarce resources.
Examine some of the tradeoffs thatExamine some of the tradeoffs that
people face.people face. Learn the meaning of opportunity cost.Learn the meaning of opportunity cost.
See how to use marginal reasoningSee how to use marginal reasoning
when making decisions.when making decisions.
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Discuss how incentives affect peoplesDiscuss how incentives affect peoplesbehaviour.behaviour.
Consider why trade among people orConsider why trade among people ornations can be good for everyone.nations can be good for everyone.
Discuss why markets are a good, butDiscuss why markets are a good, butnot perfect, way to allocate resources.not perfect, way to allocate resources.
Learn what determines some trends inLearn what determines some trends inthe overall economy.the overall economy.
Discuss how incentives affect peoplesDiscuss how incentives affect peoplesbehaviour.behaviour.
Consider why trade among people orConsider why trade among people ornations can be good for everyone.nations can be good for everyone.
Discuss why markets are a good, butDiscuss why markets are a good, butnot perfect, way to allocate resources.not perfect, way to allocate resources.
Learn what determines some trends inLearn what determines some trends inthe overall economy.the overall economy.
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the Greek word for the Greek word for one whoone whomanages a householdmanages a household..
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A household and an economy
face many decisions:
Who will work?
What goods and how many of themshould be produced?
What resources should be used in
production?
At what price should the goods besold?
A household and an economy
face many decisions:
Who will work?
What goods and how many of themshould be produced?
What resources should be used in
production?
At what price should the goods besold?
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Society and Scarce Resources:
The management of societys
resources is important because
resources are scarce. Scarcity. . . means that society has
limited resources and therefore cannot
produce all the goods and services
people wish to have.
Society and Scarce Resources:
The management of societys
resources is important because
resources are scarce. Scarcity. . . means that society has
limited resources and therefore cannot
produce all the goods and services
people wish to have.
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EconomicsEconomics is the study of how society
manages its scarce resources.
Economists study how people make
decisions: How much they work
What they buy
How much they save
How they invest their savings
EconomicsEconomics is the study of how society
manages its scarce resources.
Economists study how people make
decisions: How much they work
What they buy
How much they save
How they invest their savings
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Economists also study how people
interact such as buyers and sellers.
Price determination.
Economists also analyze forces andtrends that affect the economy as a whole.
Growth in average income
The rate of price increase.
Economists also study how people
interact such as buyers and sellers.
Price determination.
Economists also analyze forces andtrends that affect the economy as a whole.
Growth in average income
The rate of price increase.
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There is no mystery to what an economy
is.
Its a group people interacting with one
another as they go about their lives. We start the study of economics with four
principles of individual decision making:
People face tradeoffs
The cost of something is what you give up toget it.
Rational people think at the margin.
People respond to incentives.
There is no mystery to what an economy
is.
Its a group people interacting with one
another as they go about their lives. We start the study of economics with four
principles of individual decision making:
People face tradeoffs
The cost of something is what you give up toget it.
Rational people think at the margin.
People respond to incentives.
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There isnosuch thingasa free lunch
To get something we like we usually have
to give up something we dont like.
A student and her time: Studying vs.napping or cycling.
Societys tradeoffs:
Guns vs.Butter
Clean environment and higher income
There isnosuch thingasa free lunch
To get something we like we usually have
to give up something we dont like.
A student and her time: Studying vs.napping or cycling.
Societys tradeoffs:
Guns vs.Butter
Clean environment and higher income
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Making decisions requires comparing
the costsand benefits of alternative
courses of actions.
To go to university or not to go?
Opportunity cost: Whatever must be
given up to obtain some item.
Making decisions requires comparing
the costsand benefits of alternative
courses of actions.
To go to university or not to go?
Opportunity cost: Whatever must be
given up to obtain some item.
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Marginal changes: Small incremental
adjustments to marginal changes.
Individuals and firms can make better
decisions by thinking at the margin.
By comparing the marginal benefits
(MB) with the associated marginalcosts
(MC
) of a decision.
Marginal changes: Small incremental
adjustments to marginal changes.
Individuals and firms can make better
decisions by thinking at the margin.
By comparing the marginal benefits
(MB) with the associated marginalcosts
(MC
) of a decision.
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Marginal changes in costs or benefits
motivate people to respond.
When the price of apples rise
The decision to choose one alternativeover another occurs when that
alternatives marginal benefits exceed its
marginal costs!
Marginal changes in costs or benefits
motivate people to respond.
When the price of apples rise
The decision to choose one alternativeover another occurs when that
alternatives marginal benefits exceed its
marginal costs!
Principle 4: People Respond toPrinciple 4: People Respond to
IncentiveIncentive
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The first four principles discussed how
individuals make decisions.
The next three principles concern how
people interact with one another.
The first four principles discussed how
individuals make decisions.
The next three principles concern how
people interact with one another.
HOW PEOPLE INTERACTHOW PEOPLE INTERACT
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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.
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.
Principle 5: Trade can MakePrinciple 5: Trade can Make
Everyone Better OffEveryone Better Off
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Market economy: An economy that allocatesresources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
Firms decide whom to hire and what to make.
Households decide which firms to work for and
what to buy with their incomes.
Market economy: An economy that allocatesresources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
Firms decide whom to hire and what to make.
Households decide which firms to work for and
what to buy with their incomes.
Principle 6: Markets are Usually aPrinciple 6: Markets are Usually a
Good Way to Organize EconomicGood Way to Organize Economic
ActivityActivity
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Market economy: An economy that
allocates resources through the
decentralized decisions of many firms andhouseholds as they interact in markets for
goods and services.
Firms decide whom to hire and what to
make. Households decide which firms to work
for and what to buy with their incomes.
Market economy: An economy that
allocates resources through the
decentralized decisions of many firms andhouseholds as they interact in markets for
goods and services.
Firms decide whom to hire and what to
make. Households decide which firms to work
for and what to buy with their incomes.
Principle 6: Markets are Usually aPrinciple 6: Markets are Usually a
Good Way to Organize EconomicGood Way to Organize Economic
ActivityActivity
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When the invisible handdoes not work.
Market failure: A solution in which a market left
on its own fails to allocate resources
efficiently.
Externality: The impact of one persons actions
on the well-being of a bystander.
Market power: The ability of a single economic
actor (or small group of actors) to have asubstantial influence on market prices.
When the invisible handdoes not work.
Market failure: A solution in which a market left
on its own fails to allocate resources
efficiently.
Externality: The impact of one persons actions
on the well-being of a bystander.
Market power: The ability of a single economic
actor (or small group of actors) to have asubstantial influence on market prices.
Principle 7: Governments canPrinciple 7: Governments can
Sometimes Improve MarketSometimes Improve Market
OutcomesOutcomes
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The last three principles concern the workings of
the economy as a whole.
The last three principles concern the workings of
the economy as a whole.
HOW THEECONOMYAS AHOW THEECONOMYAS A
WHOLE WORKSWHOLE WORKS
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In Afghanistan
In January 1991, a daily newspaper cost Afs. 3.
In November 1998, the same paper cost 70 000
Afs.
Inflation: An increase in the overall level of
prices in the economy.
One cause of inflation is the growth in the
quantity of money.
When the government creates large quantities of
money, the value of the money falls.
In Afghanistan
In January 1991, a daily newspaper cost Afs. 3.
In November 1998, the same paper cost 70 000
Afs.
Inflation: An increase in the overall level of
prices in the economy.
One cause of inflation is the growth in the
quantity of money.
When the government creates large quantities of
money, the value of the money falls.
Principle 9: Prices Rise when thePrinciple 9: Prices Rise when the
Government Prints Too MuchGovernment Prints Too Much
MoneyMoney
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Phillips curve: A curve that shows theshort-run tradeoff between inflation and
unemployment.
Phillips curve: A curve that shows theshort-run tradeoff between inflation and
unemployment.
Principle 10: Society Faces aPrinciple 10: Society Faces a
ShortShort--Run TradeoffBetweenRun TradeoffBetween
Inflation and Unemployment.Inflation and Unemployment.
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When individuals make decisions, they
face tradeoffs among alternative goals.
The cost of any action is measured in
terms of foregone opportunities. Rational people make decisions by
comparing marginal costs and marginal
benefits.
People change their behavior in response
to the incentives they face.
When individuals make decisions, they
face tradeoffs among alternative goals.
The cost of any action is measured in
terms of foregone opportunities. Rational people make decisions by
comparing marginal costs and marginal
benefits.
People change their behavior in response
to the incentives they face.
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Trade can be mutually beneficial.
Markets are usually a good way of
coordinating trade among people.
Government can potentially improvemarket outcomes if there is some market
failure or if the market outcome is
inequitable.
Productivity is the ultimate source of
living standards.
Trade can be mutually beneficial.
Markets are usually a good way of
coordinating trade among people.
Government can potentially improvemarket outcomes if there is some market
failure or if the market outcome is
inequitable.
Productivity is the ultimate source of
living standards.
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Money growth is the ultimate source of
inflation. Society faces a short-run tradeoff between
inflation and unemployment.
Money growth is the ultimate source of
inflation. Society faces a short-run tradeoff between
inflation and unemployment.
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