7/31/2019 Ch1 Intro-Ten Principles
1/24
Ten Principles ofEconomics
7/31/2019 Ch1 Intro-Ten Principles
2/24
Economy. . .
The word economycomes from aGreek word for
one who manages a household.
7/31/2019 Ch1 Intro-Ten Principles
3/24
A Household and an Economy
Face Many Decisions:
Who will work?
What goods and how many ofthem should be produced?
What resources should be used in
production?At what price should the goods be
sold?
7/31/2019 Ch1 Intro-Ten Principles
4/24
Society and ScarceResources:
The management of societys
resources is important becauseresources are scarce.
Scarcity. . . means that societyhas limited resources andtherefore cannot produce all thegoods and services people wish tohave.
7/31/2019 Ch1 Intro-Ten Principles
5/24
Economics is a Science ofScarcity
Economics is the study of howsociety uses scarce resources to
produce valuable commodities anddistribute them among differentpeople.
Scarcity Efficiency
7/31/2019 Ch1 Intro-Ten Principles
6/24
Overview of the subject
How people make decisions
How people interact with each other
How economy as whole works
7/31/2019 Ch1 Intro-Ten Principles
7/24
How People Make Decisions
People face tradeoffs.
The cost of something is whatyou give up to get it.
Rational people think at the
margin.People respond to incentives.
7/31/2019 Ch1 Intro-Ten Principles
8/24
How People Interact WithEach Other
Trade can make everyone better off.
Markets are usually a good way toorganize economic activity.
Governments can sometimes
improve economic outcomes.
7/31/2019 Ch1 Intro-Ten Principles
9/24
How the Economy as aWhole Works
A Countrys Standard of LivingDepends on its Ability to Produce
Goods and Services Prices Rise When the Government
Prints Too Much Money
Society Faces a Short-Run Trade Offbetween Inflation andUnemployment
7/31/2019 Ch1 Intro-Ten Principles
10/24
Principle 1: People FaceTrade Offs
To get one thing, we usually have to giveup another thing. Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity
Making decisions requires tradingoff one goal against another.
7/31/2019 Ch1 Intro-Ten Principles
11/24
Principle 1: People FaceTrade Offs
Efficiency v. Equity
Efficiencymeans society gets the most
that it can from its scarce resources. Equitymeans the benefits of those
resources are distributed fairly amongthe members of society.
7/31/2019 Ch1 Intro-Ten Principles
12/24
Principle 2:The Cost of Something is
What you give up to Get it.
Decisions require comparing costsand benefits of alternatives.
Whether to go to college or to work? Whether to study or go out on a date?
Whether to go to class or sleep in?
The opportunity costof an item iswhat you give up to obtain thatitem.
7/31/2019 Ch1 Intro-Ten Principles
13/24
Principle 3; Rational PeopleThink at Margin
Marginal changes are small,incremental adjustments to an
existing plan of action.
People make decisions by comparing
costs and benefits at the margin.
7/31/2019 Ch1 Intro-Ten Principles
14/24
Principle 4:People Respondto Incentive
Marginal changes in costs or benefitsmotivate people to respond.
The decision to choose onealternative over another occurswhen that alternatives marginal
benefits exceed its marginal costs!
7/31/2019 Ch1 Intro-Ten Principles
15/24
Principle 5:Trade Can MakeEveryone Better Off
People gain from their ability totrade with one another.
Competition results in gains fromtrading.
Trade allows people to specialize in
what they do best.
7/31/2019 Ch1 Intro-Ten Principles
16/24
Principle 6:Markets are UsuallyGood Way to Organise Activity
A market economyis an economy thatallocates resources through thedecentralized decisions of many firms andhouseholds as they interact in marketsfor goods and services.
Households decide what to buy and who to
work for. Firms decide who to hire and what to produce.
7/31/2019 Ch1 Intro-Ten Principles
17/24
Principle 6:Markets are UsuallyGood Way to Organise Activity
Adam Smith made the observation thathouseholds and firms interacting inmarkets act as if guided by an invisible
hand. Because households and firms look at prices
when deciding what to buy and sell, theyunknowingly take into account the social costs
of their actions. As a result, prices guide decision makers to
reach outcomes that tend to maximize thewelfare of society as a whole.
7/31/2019 Ch1 Intro-Ten Principles
18/24
Principle 7:Government CanSometimes Improve the Market
Outcome
Market failure occurs when themarket fails to allocate resourcesefficiently.
When the market fails (breaksdown) government can intervene topromote efficiency and equity.
Principle 7:Government Can
7/31/2019 Ch1 Intro-Ten Principles
19/24
Principle 7:Government CanSometimes Improve the MarketOutcome
Market failure may be caused by
an externality, which is the impact of
one person or firms actions on thewell-being of a bystander.
market power, which is the ability of asingle person or firm to unduly
influence market prices.
7/31/2019 Ch1 Intro-Ten Principles
20/24
Principle 8: Standard of LivingDepends on Countrys Production
Standard of living may be measuredin different ways:
By comparing personal incomes. By comparing the total market value of
a nations production.
7/31/2019 Ch1 Intro-Ten Principles
21/24
Principle 8: Standard of LivingDepends on Countrys Production
Almost all variations in livingstandards are explained by
differences in countriesproductivities.
Productivityis the amount of goods
and services produced from eachhour of a workers time.
7/31/2019 Ch1 Intro-Ten Principles
22/24
Principle 8: Standard of LivingDepends on Countrys Production
Standard of living may be measuredin different ways:
By comparing personal incomes. By comparing the total market value of
a nations production.
Principle 9: Prices Rise when
7/31/2019 Ch1 Intro-Ten Principles
23/24
Principle 9: Prices Rise whenGovernment Prints Too MuchMoney
Inflation is an increase in the overalllevel of prices in the economy.
One cause of inflation is the growthin the quantity of money.
When the government creates large
quantities of money, the value ofthe money falls.
Principle 10:Society Faces Short Term
7/31/2019 Ch1 Intro-Ten Principles
24/24
Principle 10:Society Faces Short TermTrade Off Between Inflation and
Unemployment
The Phillips Curve illustrates thetradeoff between inflation and
unemployment:Inflation Unemployment
Its a short-run tradeoff!