Download - Ch01 Ten Principles
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PowerPoint Lecture Presentation
to accompany
Principles of Economics, Third EditionN. Gregory Mankiw
Prepared y Mark P. !arscig, "entral Missouri #tate $ni%ersity.
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&'NT()*$"T')N
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&&Ten Principles ofEconomics
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Economy. . .
. . . The word economycomes from a Greek
word for one who manages a household.
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TEN PRINCIPLES OFECONOMICS
A household and an economy
face many decisions:
Who will work?
What goods and how many of them should beroduced?
What resources should be used in roduction?
At what rice should the goods be sold?
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TEN PRINCIPLES OFECONOMICS
!ociety and !carce "esources:
The management of society#s resources is
imortant because resources are scarce.
Scarcity. . . means that society has limited resources
and therefore cannot roduce all the goods and
ser$ices eole wish to ha$e.
%!kortur& $'sa( til hagfr)(i sem hinna d*ru fr)(a&+ar sem fengist er $i( $andam,l skortsins
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TEN PRINCIPLES OFECONOMICS
Economicsis the study of how society manages
its scarce resources.
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TEN PRINCIPLES OFECONOMICS
-ow eole make decisions.
eole face tradeoffs.
The cost of something is what you gi$e u to get it.
"ational eole think at the margin.
eole resond to incenti$es.
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TEN PRINCIPLES OFECONOMICS
-ow eole interact with each other.
Trade can make e$eryone better off.
/arkets are usually a good way to organi0e
economic acti$ity. Go$ernments can sometimes imro$e economic
outcomes.
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TEN PRINCIPLES OFECONOMICS
The forces and trends that affect how the
economy as a whole works.
The standard of li$ing deends on a country#s
roduction. rices rise when the go$ernment rints too much
money.
!ociety faces a short1run tradeoff between inflationand unemloyment.
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Principle #1: People Face Tradeoffs.
There is no such thing as a free lunch2
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Main! decisions re"ires $radin!
off one !oal a!ains$ ano$%er.
Principle #1: People Face Tradeoffs.
To get one thing& we usually ha$e to gi$e u
another thing.
Guns $. butter
3ood $. clothing
4eisure time $. work
5fficiency $. e6uity
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Principle #1: People Face Tradeoffs
5fficiency $. 56uity
Efficiency*means society gets the most that it can
from its scarce resources.
Equity**means the benefits of those resources aredistributed fairly among the members of society.
% !kil$irkni%%!anngirni
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Principle #&: T%e Cos$ of Some$%in! Is '%a$(o )i*e +p $o )e$ I$.
7ecisions re6uire comaring costs and benefits
of alternati$es.
Whether to go to college or to work? Whether to study or go out on a date?
Whether to go to class or slee in?
The opportunity costof an item is what yougi$e u to obtain that item.
%f8rnarkostna(ur
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Principle #&: T%e Cos$ of Some$%in! Is '%a$(o )i*e +p $o )e$ I$.
4A 4aker basketball star
9obe ryant chose to
ski college and gostraight from high
school to the ros where
he has earned millions
of dollars.
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People mae decisions ,y comparin!
cos$s and ,enefi$s a$ $%e mar!in.
Principle #-: Ra$ional People T%in a$ $%eMar!in.
Marginal changesare small& incremental%
ad;ustments to an e
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Principle #: People Respond $o Incen$i*es.
/arginal changes in costs or benefits moti$ate
eole to resond.
The decision to choose one alternati$e o$er
another occurs when that alternati$e#s marginalbenefits e
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Principle #/: Trade Can Mae E*eryone0e$$er Off.
eole gain from their ability to trade with one
another =hagnast af m*guleika a( eiga
$i(skiti>
ometition results in gains from trading.
Tradeallows eole to seciali0e in what they
do best.
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Principle #: Mare$s 2re +sally a )ood'ay $o Or!ani3e Economic 2c$i*i$y.
A market economyis an economy that allocates
resources through the decentrali0ed decisions of
many firms and households as they interact in
markets for goods and ser$ices. -ouseholds decide what to buy and who to work
for.
3irms decide who to hire and what to roduce.
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Principle #: Mare$s 2re +sally a )ood'ay $o Or!ani3e Economic 2c$i*i$y.
Adam !mith made the obser$ation that
households and firms interacting in markets act
as if guided by an in$isible hand.
ecause households and firms look at rices whendeciding what to buy and sell& they unknowingly
take into account the social costs of their actions.
As a result& rices guide decision makers to reachoutcomes that tend to ma
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Principle #4: )o*ernmen$s Can Some$imesImpro*e Mare$ O$comes.
Market failureoccurs when the market fails toallocate resources efficiently.
When the market fails =breaks down>
go$ernment can inter$ene to romote efficiencyand e6uity.
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Principle #4: )o*ernmen$s Can Some$imesImpro*e Mare$ O$comes.
/arket failure may be caused by
an externality&which is the imact of one erson or
firm#s actions on the well1being of a bystander.
7)mi& mengun 2 @egati$e e
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Principle #5: T%e S$andard of Li*in! 6ependson a Con$ry7s Prodc$ion.
!tandard of li$ing may be measured in different
ways:
y comaring ersonal incomes.
y comaring the total market $alue of a nation#sroduction.
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Principle #5: T%e S$andard of Li*in! 6ependson a Con$ry7s Prodc$ion.
Almost all $ariations in li$ing standards are
e
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Principle #5: T%e S$andard of Li*in! 6ependson a Con$ry7s Prodc$ion.
!tandard of li$ing may be measured in different
ways:
y comaring ersonal incomes. y comaring the total market $alue of a nation#s
roduction.
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Principle #8: Prices Rise '%en $%e)o*ernmen$ Prin$s Too Mc% Money.
nflation is an increase in the o$erall le$el ofrices in the economy.
Bne cause of inflation is the growth in the
6uantity of money.
When the go$ernment creates large 6uantities
of money& the $alue of the money falls.
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Principle #19: Socie$y Faces a S%or$rnTradeoff 0e$;een Infla$ion and+nemploymen$. The hillis ur$eillustrates the tradeoff
between inflation and unemloyment:
nflationCnemloyment
t#s a short1run tradeoff2
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Smmary
When indi$iduals make decisions& they facetradeoffs among alternati$e goals.
The cost of any action is measured in terms of
foregone oortunities.
"ational eole make decisions by comaring
marginal costs and marginal benefits.
eole change their beha$ior in resonse to the
incenti$es they face.
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Smmary
Trade can be mutually beneficial.
/arkets are usually a good way of coordinating
trade among eole.
Go$ernment can otentially imro$e market
outcomes if there is some market failure or if
the market outcome is ine6uitable.
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Smmary
roducti$ity is the ultimate source of li$ingstandards.
/oney growth is the ultimate source of
inflation.
!ociety faces a short1run tradeoff between
inflation and unemloyment.