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Transcript of Chapter 1 Introduction to Economics
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2007 Thomson South-Western
PowerPoint Lecture Presentation to accompany
Principles of Macroeconomics,Malaysia EditionN. Gregory Mankiw, Goh Soo Khoon, Ong way !oon, "en Siew wa, #heng Ming "u,
Mus$afarshah Moh% Mustafa, "&onne Lee Lean 'e
Prepare% (y Kathryn Nant$ an% Laurence Miners )*airfiel% +ni&ersity, Goh Soo Khoon - "en Siew wa )+SM, Mus$afarshah Moh% Mustafa )++M,
Ong way !oon - "&onne Lee Lean 'e )MM+, #heng Ming "u )+/0,
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. . . The word economycomes from a Greek
word for one who manages a household.
'conomy. . .
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TE !"#$#!%ES &' E$&&(#$S
) household and an econom* face man* dec+s+ons,
Who w+ll work
What goods and how man* of them should e
/roduced
What resources should e used +n /roduct+on
)t what /r+ce should the goods e sold
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TE !"#$#!%ES &' E$&&(#$S
Soc+et* and Scarce "esources,
The management of soc+et*1s resources +s
+m/ortant ecause resources are scarce.
Scarcity. . . means that soc+et* has l+m+ted
resources and therefore cannot /roduce all the
goods and ser+ces /eo/le w+sh to hae.
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TE !"#$#!%ES &' E$&&(#$S
Economics+s the stud* of how soc+et* manages
+ts scarce resources.
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There +s no such th+ng as a free lunch6
Principle 123 People *ace ra%e4offs.
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Making decisions requires tradingoff one goal against another.
Principle 123 People *ace ra%e4offs.
To get one th+ng we usuall* hae to g+e u/
another th+ng.
8+c*cle . utter
'ood . cloth+ng
%e+sure t+me . work
Eff+c+enc* . e9u+t*
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Principle 123 People *ace ra%e4offs
Eff+c+enc* . E9u+t*
Efficiencymeans soc+et* gets the most that +t can
from +ts scarce resources.
Equitymeans the enef+ts of those resources ared+str+uted fa+rl* among the memers of soc+et*.
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Principle 153 he #ost of Something 6s7hat "ou Gi&e +p to Get 6t.
5ec+s+ons re9u+re com/ar+ng costs and enef+ts
of alternat+es.
Whether to go to college or to work
Whether to stud* or go out on a date
Whether to go to class or slee/ +n
The opportunity costof an +tem +s what *oug+e u/ to ota+n that +tem.
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Principle 153 he #ost of Something 6s 7hat "ou Gi&e+p to Get 6t.
World S9uash
$ham/+on +col 5a+d
understands o//ortun+t*
costs and incentives.She dec+ded to /ut on
hold her academ+c
+nterests to concentrate
on s9uash where sheearns hundreds of
thousands of r+ngg+t.
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Marginal changesare small +ncrementalad:ustments to an e;+st+ng /lan of act+on.
People make decisions by comparing
costs and benefits at the margin.
Principle 183 0ational People hink at theMargin.
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Principle 193 People 0espon% to6ncenti&es.
(arg+nal changes +n costs or enef+ts mot+ate
/eo/le to res/ond.
The dec+s+on to choose one alternat+e oer
another occurs when that alternat+e1s marg+nal
enef+ts e;ceed +ts marg+nal costs6
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3&W !E&!%E #TE")$T
Trade can make eer*one etter off.
(arkets are usuall* a good wa* to organ+
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Principle 1:3 ra%e #an Make '&eryone!etter Off.
!eo/le ga+n from the+r a+l+t* to trade w+th one
another.
$om/et+t+on results +n ga+ns from trad+ng.
Trade allows /eo/le to s/ec+al+
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Principle 1;3 Markets /re +sually a Goo%7ay to Organi$e 'conomic /cti&ity.
) market economy+s an econom* that allocates
resources through the decentral+
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Principle 1;3 Markets /re +sually a Goo%7ay to Organi$e 'conomic /cti&ity.
)dam Sm+th made the oserat+on that
households and f+rms +nteract+ng +n markets act
as +f gu+ded * an +n+s+le hand.
8ecause households and f+rms look at /r+ces whendec+d+ng what to u* and sell the* unknow+ngl*
take +nto account the soc+al costs of the+r act+ons.
)s a result /r+ces gu+de dec+s+on makers to reachoutcomes that tend to ma;+m+
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Principle 1goernment can +nterene to /romote eff+c+enc*
and e9u+t*.
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Principle 1
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3&W T3E E$&&(? )S )
W3&%E W&"4S ) countr*1s standard of l++ng de/ends on +ts
a+l+t* to /roduce goods and ser+ces.
!r+ces r+se when the goernment /r+nts too
much mone*.
Soc+et* faces a short-run trade-off etween
+nflat+on and unem/lo*ment.
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Principle 1=3 / #ountry>s Stan%ar% of Li&ing?epen%s on 6ts /(ility to Pro%uce Goo%s an%Ser&ices.
Standard of l++ng ma* e measured +n d+fferent
wa*s,
8* com/ar+ng /ersonal +ncomes.
8* com/ar+ng the total market alue of a nat+on1s/roduct+on.
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Principle 1=3 / #ountry>s Stan%ar% of Li&ing?epen%s on 6ts /(ility to Pro%uce Goo%s an%Ser&ices.
)lmost all ar+at+ons +n l++ng standards aree;/la+ned * d+fferences +n countr+es1
/roduct++t+es.
Productivity+s the amount of goods andser+ces /roduced from each hour of a worker1s
t+me.
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Principle 1=3 / #ountry>s Stan%ar% of Li&ing?epen%s on 6ts /(ility to Pro%uce Goo%s an%Ser&ices.
Standard of l++ng ma* e measured +n d+fferentwa*s,
8* com/ar+ng /ersonal +ncomes.
8* com/ar+ng the total market alue of a nat+on1s/roduct+on.
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Principle 1@3 Prices 0ise 7hen theGo&ernment Prints oo Much Money.
Inflation+s an +ncrease +n the oerall leel of/r+ces +n the econom*.
&ne cause of +nflat+on +s the growth +n the
9uant+t* of mone*.
When the goernment creates large 9uant+t+es
of mone* the alue of the mone* falls.
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Principle 12A3 Society *aces a Short4run ra%e4off (etween 6nflation an% +nemployment.
The !h+ll+/s $ure +llustrates the trade-offetween +nflat+on and unem/lo*ment,
#nflat+on or @nem/lo*ment
#t1s a short-run trade-off6
The trade-off /la*s a ke* role +n the anal*s+s of the
usiness cycleAfluctuat+ons +n econom+c act++t*
such as em/lo*ment and /roduct+on
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Summary
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The /r+nc+/les of /ersonal dec+s+on mak+ng
are,
B!eo/le face trade-offs.
BThe cost of someth+ng +s what *ou g+e u/ to get
+t.
B"at+onal /eo/le th+nk at the marg+n.
B!eo/le res/ond to +ncent+es.
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The /r+nc+/les of econom+c +nteract+on are,
BTrade can make eer*one etter off.
B(arkets are usuall* a good wa* to organ+
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Summary
The /r+nc+/les of the econom* as a whole are,
B) countr*1s standard of l++ng de/ends on +ts
a+l+t* to /roduce goods and ser+ces.
B!r+ces r+se when the goernment /r+nts too much
mone*.
BSoc+et* faces a short-run trade-off etween
+nflat+on and unem/lo*ment.