Ten Principles of Economics Presentation_1!3!10

8/8/2019 Ten Principles of Economics Presentation_1!3!10

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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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Ten Principles of Economics Presentation_1!3!10

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