(c) ten principles of economics

8/10/2019 (C) Ten Principles of Economics

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At the conclusion of the session, you must beable to:

1. Master the ten principles of economics.

2. Make a glossary of the key concepts in theprinciples of economics.

3. Cite examples indicating the application of the

principles of economics in ones life or thePhilippine society.


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Society and Scarce Resources:

The management of societys resources is

important because resources are scarce.

Scarcity. . . means that society has limitedresources and therefore cannot produce all the

goods and services people wish to have.


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Economicsis the study of how society managesits scarce resources.

. . . The word economyjust like economicscomes from the Greek word oikonomos

meaning one who manages a household.


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How people make decisions.

How people interact with each other.

The forces and trends that affect how theeconomy as a whole works.


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People face tradeoffs.

The cost of something is what you give up to getit.

Rational people think at the margin.

People respond to incentives.


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Trade can make everyone better off.

Markets are usually a good way to organizeeconomic activity.

Governments can sometimes improve economic

outcomes.


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The forces and trends that affect how the

economy as a whole works.

The standard of living depends on a countrysproduction.

Prices rise when the government prints too much

money.

Society faces a short-run tradeoff betweeninflation and unemployment.


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There is no such thing as a free lunch!

You don't get something for nothing.



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Making decisions requires trading

off one goal against another.

To get one thing, we usually have to give upanother thing.

Guns v. butter Food v. clothing

Leisure time v. work

Efficiency v. equity



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Efficiency v. Equity

Efficiencymeans society gets the most that it can

from its scarce resources. Equitymeans the benefits of those resources are

distributed fairly among the members of society.



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Decisions require comparing costs andbenefits 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 is what yougive up to obtain that item.



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LA Laker basketball starKobe Bryant chose to

skip college and gostraight from highschool to the pros wherehe has earned millionsof dollars.



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People make decisions by comparing

costs and benefits at the margin.

Marginal changesare small, incrementaladjustments to an existing plan of action.



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Marginal changes in costs or benefitsmotivate people to respond.

The decision to choose one alternative overanother occurs when that alternativesmarginal benefits exceed its marginal costs!



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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.



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A market economyis an economy thatallocates resources through the decentralized

decisions of many firms and households asthey interact in markets for goods andservices.

Households decide what to buy and who to work

for.

Firms decide who to hire and what to produce.



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Adam Smith made the observation thathouseholds and firms interacting in marketsact as if guided by an invisible hand.

Because households and firms look at prices whendeciding what to buy and sell, they unknowingly

take into account the social costs of their actions.

As a result, prices guide decision makers to reachoutcomes that tend to maximize the welfare of

society as a whole.



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Market failureoccurs when the market fails toallocate resources efficiently.

When the market fails (breaks down)

government can intervene to promoteefficiency and equity.



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Market failure may be caused by

an externality, which is the impact of one person or

firms actions on the well-being of a bystander.

market power, which is the ability of a single personor firm to unduly influence market prices.



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Standard of living may be measured indifferent ways:

By comparing personal incomes. By comparing the total market value of a nations

production.

How the economy as a whole works.


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Inflation is an increase in the overall level ofprices in the economy.

One cause of inflation is the growth in thequantity of money. When the government creates large

quantities of money, the value of the moneyfalls.



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In the short run, increases in the prices ofgoods tend to generate employment;

decreases in the prices of goods tend to resultinto unemployment:

InflationUnemploymentIts a short-run tradeoff!



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When individuals make decisions, they facetradeoffs among alternative goals.

The cost of any action is measured in terms offoregone 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 improve market

outcomes if there is some market failure or ifthe market outcome is inequitable.


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Productivity is the ultimate source of livingstandards.

Money growth is the ultimate source ofinflation. Society faces a short-run tradeoff between

inflation and unemployment.

(c) ten principles of economics

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