Ch01 Ten Priciples of Economics

8/2/2019 Ch01 Ten Priciples of Economics

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Ten Principles ofTen Principles ofEconomicsEconomics

Ten Principles ofTen Principles ofEconomicsEconomics

SARFARAZ N PATHANSARFARAZ N PATHANSARFARAZ N PATHANSARFARAZ N PATHAN


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In this chapter you will Learn that economics is abouttheallocation of scarce resources.

Examine some ofthe tradeoffs thatpeople face.

Learn the meaning of opportunitycost.

See how to use marginal reasoning whenmaking decisions.

Learn that economics is abouttheallocation of scarce resources.

Examine some ofthe tradeoffs thatpeople face.

Learn the meaning of opportunitycost.

See how to use marginal reasoning whenmaking decisions.


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In this chapter you will Discuss how incentives affect peoplesDiscuss how incentives affect peoplesbehaviourbehaviour..

Consider whytrade among people orConsider whytrade among people ornations can be good for everyone.nations can be good for everyone.

Discuss whymarkets are a good,but notDiscuss whymarkets are a good,but notperfect, wayto allocate resources.perfect, wayto allocate resources.

Learn whatdetermines some trends inLearn whatdetermines some trends inthe overall economy.the overall economy.

Discuss how incentives affect peoplesDiscuss how incentives affect peoplesbehaviourbehaviour..

Consider whytrade among people orConsider whytrade among people ornations can be good for everyone.nations can be good for everyone.

Discuss whymarkets are a good,but notDiscuss whymarkets are a good,but notperfect, wayto allocate resources.perfect, wayto allocate resources.

Learn whatdetermines some trends inLearn whatdetermines some trends inthe overall economy.the overall economy.


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The Word Economy Comes From

the Greek word for the Greek word for one whoone who

manages a householdmanages a household..


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TEN PRINCIPLES OF ECONOMICS A household and an economy

face many decisions:

Who will work?

What goods and how many of them

should be produced?

What resources should be used in

production? At what price should the goods be

sold?

A household and an economy

face many decisions:

Who will work?

What goods and how many of them

should be produced?

What resources should be used in

production? At what price should the goods be

sold?


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TEN PRINCIPLES OF ECONOMICS

Chapter 1:Page 6

Society and Scarce Resources:

The management of societys

resources is important becauseresources are scarce.

Scarcity. . . means that society has

limited resources and therefore cannot

produce all the goods and servicespeople wish to have.

Society and Scarce Resources:

The management of societys

resources is important becauseresources are scarce.

Scarcity. . . means that society has

limited resources and therefore cannot

produce all the goods and servicespeople wish to have.


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Chapter 1:Page 7

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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Chapter 1:Page 8

Economists also study how people

interact such as buyers and sellers.

Price determination. Economists also analyze forces and

trends 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 and

trends that affect the economy as a whole.

Growth in average income

The rate of price increase.


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HOW PEOPLE MAKE DECISIONS

Chapter 1:Page 9

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 to

get 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 to

get it.

Rational people think at the margin.

People respond to incentives.


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Principle 1: People Face Tradeoffs

Chapter 1:Page 10

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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Principle 1: People Face Tradeoffs

Chapter 1:Page 11

Societys tradeoffs (contd):

Efficiency vs.Equity

Efficiency: Society getting the most itcan from its scarce resources.

Equity: Distributing economic

prosperity fairly among the members of

society.

Societys tradeoffs (contd):

Efficiency vs.Equity

Efficiency: Society getting the most itcan from its scarce resources.

Equity: Distributing economic

prosperity fairly among the members of

society.


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Principle 2: The Cost of Something

is what You Give Up

Chapter 1:Page 12

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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Principle 3: Rational People Think

at the Margin

Chapter 1:Page 13

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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Chapter 1:Page 14

Marginal changes in costs or benefits

motivate people to respond.

When the price of apples rise The decision to choose one alternative

over 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 alternative

over 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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Chapter 1:Page 15

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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Chapter 1:Page 16

People gain from their ability to trade withone another.

Competition results in gains from trading.

Trade allows people to specialize in what

they do best.

People gain from their ability to trade withone 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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Chapter 1:Page 17

Market economy: An economy that

allocates resources through thedecentralized decisions of many firms and

households as they interact in markets for

goods and services.

Firms decide whom to hire and what tomake.

Households decide which firms to work

for and what to buy with their incomes.


allocates resources through thedecentralized decisions of many firms and

households as they interact in markets for

goods and services.

Firms decide whom to hire and what tomake.

Households decide which firms to work


Principle 6: Markets are Usually aPrinciple 6: Markets are Usually a

Good Way to Organize EconomicGood Way to Organize EconomicActivityActivity


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Chapter 1:Page 18


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



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


CONTINUECONTINUE


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Chapter 1:Page 19

When the invisible handdoes not work.

Market failure: A solution in which a market lefton 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 a

substantial influence on market prices.

When the invisible handdoes not work.

Market failure: A solution in which a market lefton 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 a

substantial influence on market prices.

Principle 7: Governments canPrinciple 7: Governments can

Sometimes Improve

Market

Sometimes Improve

MarketOutcomesOutcomes


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Chapter 1:Page 20

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 THE ECONOMYAS AHOW THE ECONOMYAS A

WHOLE WORKSWHOLE WORKS


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Chapter 1:Page 21

Standardof Livingmay be measured in

different ways (e.g. personal income or totalmarket value of a nations production.)

Differences in standard of living between countries

or even provinces is attributable to the productivity

of the country or province.

Productivity: The amount of goods and servicesproduced from eachhour of a workers time.

Standardof Livingmay be measured in

different ways (e.g. personal income or totalmarket value of a nations production.)

Differences in standard of living between countries

or even provinces is attributable to the productivity

of the country or province.

Productivity: The amount of goods and servicesproduced from eachhour of a workers time.

Principle 8: A Countrys StandardPrinciple 8: A Countrys Standard

of Living Depends on its Ability toof Living Depends on its Ability to

Produce Goods and ServicesProduce Goods and Services

Productivity=> Standardof LivingProductivity=> Standardof Living


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Chapter 1:Page 22

In Germany

In January 2009, a Gold cost Rs 12000 *.

In September 2009, the Gold cost was Rs

15900*

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 Germany

In January 2009, a Gold cost Rs 12000 *.

In September 2009, the Gold cost was Rs

15900*

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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Chapter 1:Page 23

Phillips curve: A curve that shows the

short-run tradeoff between inflation and

unemployment.

Phillips curve: A curve that shows the

short-run tradeoff between inflation and

unemployment.

Principle 10: Society Faces aPrinciple 10: Society Faces aShortShort--Run TradeoffBetweenRun TradeoffBetween

Inflation and Unemployment.Inflation and Unemployment.


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Summary

Chapter 1:Page 24

When individuals make decisions, they

face tradeoffs among alternative goals.

The cost of any action is measured interms 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 interms 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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Summary

Chapter 1:Page 25

Trade can be mutually beneficial.

Markets are usually a good way of

coordinating trade among people. Government can potentially improve

market 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 improve

market 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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Summary

Chapter 1:Page 26

Money growth is the ultimate source of

inflation.

Society faces a short-run tradeoff betweeninflation and unemployment.

Money growth is the ultimate source of

inflation.

Society faces a short-run tradeoff betweeninflation and unemployment.


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The End

Chapter 1:Page 27

Ch01 Ten Priciples of Economics

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