Ten Principles of Economics

1
Chapter 1

• Ten Principles of Economics

2
The word Economy . . .

• comes from a Greek word for
• One who manages a household.

3
Scarcity...

• means that society has less to offer than
  people wish to have.
• Managing societys resources is important
• because resources are scarce.

4
Economics is the study of how society manages its
scarce resources

• Economists study. . .
• how people make decisions.
• ...how people interact with each other.
• the forces and trends that affect the economy as
  a whole.

5
Ten Principles of EconomicsHow People Make
Decisions

• 1. People face tradeoffs
• 2. The cost of something is what you give up to
  get it
• 3. Rational people think at the margin
• 4. People respond to incentives.

6
1. People face tradeoffs

• To get one thing, we usually have to
• give up another thing.
• Guns vs. Butter
• Leisure Time vs. Studying
• Environment vs. Econ Growth

7
2. The Cost of Something Is What You Give Up to
Get It

• Decisions require comparing costs and benefits of
  alternatives
• Going to college vs. going to work
• Opportunity Cost is what you give up from one
  alternative (choice) to get what you want (from
  another choice)

8
3. Rational People Think at the Margin

• Marginal changes are small, incremental
  adjustments to an existing plan of action.
• Comparing benefits and costs of a critical choice
• Marginal Benefits gt MB
• Marginal Costs gt MC

9
4. People Respond to Incentives

• Marginal changes in costs or benefits from
  decisions motivate people to respond.
• Decision to choose one good over another occurs
  when MB gt MC.

10
Ten Principles of EconomicsHow People Interact

• 5. Trade can make everyone better off.
• 6. Markets are usually a good way to organize
  economic activity.
• 7. Government can sometimes improve market
  outcomes.

11
5. Trade Can Make Everyone Better Off

• Individuals gain from their ability to trade with
  others.
• Competition results in gains from trading.
• Trade allows one to specialize in what they do
  best.

12
6. Markets Are Usually a Good Way to Organize
Economic Activity

• In a Market Economy, households and business
  firms determine what to buy, who to work for, who
  to hire and what to produce.
• Interaction between household and business is as
  if by an invisible hand.

13
7. Governments Can Sometimes Improve Market
Outcomes

• When the market fails (breaks down) government
  intervenes to
• promote Efficiency
• promote Equity

14
Efficiency Vs. Equity

• Efficiency means . . .
• getting the most you can from scarce resources.
• Equity means . . .
• benefits of resources are distributed fairly
  among society.

15
7. Governments Can Sometimes Improve Market
Outcomes

• Market failure may be the cause of an externality
  which is the impact of one persons actions on
  the well-being of another person. (example
  pollution)
• Market power is the ability of a single person to
  unduly influence market prices.

16
Ten Principles of EconomicsHow the Economy as a
Whole Works

• 8. A countrys standard of living depends on its
  ability to produce goods and services.
• 9. Prices rise when the government prints too
  much money.
• 10. Society faces a short-run tradeoff between
  inflation and unemployment.

17
8. Standard of living depends on a countrys
production.

• Standard of Living may be measured in different
  ways (e.g. personal income or total market value
  of a nations production.)
• Differences in standard of living between
  countries or even states is attributable to the
  productivity of the country or state.

18
8. Standard of living depends on a countrys
production.

• Productivity is the amount of goods and services
  produced from different resources
• Productivity gt Standard of Living

19
9. Prices Rise When The Government Prints Too
Much Money

• Inflation is an increase in the overall level of
  prices in the economy.
• One cause of inflation is the growth in the
  quantity of money.

20
10. Society Faces a Short-Run Tradeoff Between
Inflation and Unemployment
Inflation
Unemployment

• A Short-Run Tradeoff. You Choose.
• This tradeoff is called the Phillips Curve (see
  Figure 33-1, p. 763)