ten principles of economics [compatibility mode]

7/28/2019 Ten Principles of Economics [Compatibility Mode]

1/25


2/25

e wor economy comes rom a ree

word oikonomos i.e. one who mana es a

household.


3/25

Intr ducti n

u y y :

Who will work?

What goods and how many of them should be

produced?

At what price should the goods be sold?


4/25

y u :

The mana ement of societ s resources is

important because resources are scarce.

Scarcity. . . means that society has limited

resources and therefore cannot roduce all the

goods and services people wish to have.

Economics is the study of how society manages its

.


5/25

TEN PRINCIPLES F EC N MICS

1) How 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.


6/25

TENPRINCIPLESOFECONOMICS

2 How eo le interact with each other.

1. Trade can make everyone better off.

2. Markets are usually a good way to organize

economic activity.

3. Governments can sometimes improve economic

outcomes.


7/25

TENPRINCIPLESOFECONOMICS

3) The forces and trends that affect how the economy as a

whole works.

1. The standard of livin de ends on a countr s

production.

2. Prices rise when the government prints too much

money.

3. Society faces a shortrun tradeoff between inflation

an unemp oymen .


8/25

Princi l #1: P l F c Tr d .

Thereis

no

such

thing

as

afree

lunch!


9/25

Principle#1:PeopleFaceTradeoffs.

9To get one thing, we usually have to give up another

thing.

Guns v. butter

Food v. clothing

Leisure time v. work

Making decisions requires trading.


10/25

Principle#1:PeopleFaceTradeoffs

9Efficiency v. Equity

Efficiency means society is getting the maximum

.

Equity means the benefits of those resources are

distributed fairly among the members of society.


11/25

Principle#2:TheCostofSomethingIsWhatYouGive

p

o

e

.

9 Making Decisions require comparing the costs and

benefits of alternative courses of action.

e er o go o co ege or o wor

Whether to study or go out on a date?

Whether to go to class or sleep in?

9 The opportunity cost of an item is what you give up to

obtain that item.


12/25

Principle#3:RationalPeopleThinkatthe

arg n.

9Marginal changes are small, incremental

.

People make decisions by comparing

costs and benefits at the margin.


13/25

Principle#4:PeopleRespondtoIncentives.

9Marginal changes in costs or benefits motivate

people to respond.

9The decision to choose one alternative over

anot er occurs w en t at a ternat ve s

mar inal benefits exceed its mar inal costs!


14/25

Principle#5:TradeCanMakeEveryoneBetter

.

eop e ga n rom e r a y o ra e w

one another.

9Competition results in gains from trading.

9Trade allows people to specialize in what they

do best.


15/25

Principle#6:MarketsAreUsuallyaGoodWay

to

rgan ze

conom c

ct v ty.

y y

resources through the decentralized decisions of

many firms and households as they interact in

.

Households decide what to buy and who to work

for.

Firms decide who to hire and what to produce.


16/25

Principle#6:MarketsAreUsuallyaGoodWay

.

9 Adam Smith made the observation that households and

firms interacting in markets act as if guided by an invisible

.

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 reach

outcomes that tend to maximize the welfare of society as

a whole.


17/25

Principle#7:GovernmentsCanSometimes

.

allocate resources efficiently.

9When the market fails (breaks down)

government can intervene to promote

.


18/25

Principle#7:GovernmentsCanSometimes

mprove

ar et

utcomes.

an externality, which is the impact of one person or

firms actions on the wellbeing of a bystander.

market power, which is the ability of a single

person or firm to unduly influence market prices.


19/25

Principle#8:TheStandardofLivingDependson

a

ountry s

ro uct on.

an ar o v ng may e measure n

different wa s:

By comparing personal incomes.

By comparing the total market value of a nations

.


20/25

Principle#8:TheStandardofLivingDependson

a

ountry s

ro uct on.

explained by differences in countries

productivities.

9Productivity is the amount of goods and

time.


21/25

Principle#9:PricesRiseWhentheGovernment

r nts

oo

uc

oney.

n a on s an ncrease n e overa eve o

rices in the econom .

9One cause of inflation is the growth in the

quantity of money.

9When the government creates large quantities

, .


22/25

Principle#10:SocietyFacesaShortrunTradeoff

etween

n at onan

nemp oyment.

e ps urve us ra es e ra eo

between inflation and unem lo ment:

InflationUnemployment

9 Its a shortrun tradeoff!


23/25

9 When individuals make decisions, they face tradeoffs

among alternative goals.

opportunities.

9 Rational people make decisions by comparing marginal

costs and mar inal benefits.

9 People change their behavior in response to the

incentives they face.


24/25

Summ r

u u y .

9Markets are usually a good way of coordinating trade

among people.

9Government can potentially improve market

outcomes if there is some market failure or if the

market outcome is inequitable.


25/25

Summ r

u v y u u v g

standards.

9Money growth is the ultimate source of inflation.

9 Society faces a shortrun tradeoff between inflation

and unem lo ment.

ten principles of economics [compatibility mode]

Documents