TEN PRINCIPLES OF ECONOMY.pptx

1 Nicholas Gregory Mankiw 2  Nicholas Gregory Mankiw ▪ American macroeconomist and, Chairman and Professor of Economics at Harvard University. ▪ Mankiw was chairman of the Council of Economic Advisers under President George W. Bush ▪ In 2006, he became an economic adviser to Mit...

1 Nicholas Gregory Mankiw 2  Nicholas Gregory Mankiw ▪ American macroeconomist and, Chairman and Professor of Economics at Harvard University. ▪ Mankiw was chairman of the Council of Economic Advisers under President George W. Bush ▪ In 2006, he became an economic adviser to Mitt Romney ▪ Ranked the number one economics blog by US economics professors ▪ He is also author of the best-selling textbook Principles of Economics, 3 4 PRINCIPLE 1 5 People Face Trade Offs Trade off is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. 6 Society faces trade off between Efficiency & Equity ▪ Efficiency:- society getting the most from its scarce resources. ▪ Equity:- Distributing economic prosperity fairly among the individuals of the society. 7  Life Example A student faces a trade off between studying for exam or to watch a much awaited movie. 8  Question for Review Describe some of the trade-offs faced by each of the following: ▪ A) a family deciding whether to buy a new car A family faces a trade off whether to buy a car or spend the money on savings for meeting the future needs such as for higher education for their children. 9 ▪ B) a member of Congress deciding how much to spend on national parks In this case the member of congress faces a trade off whether to spend much on national parks or to use the money for the up liftment of other services by the government to the society 10 PRINCIPLE 2 11 The Cost of Something is What You Give up to get it 12 ▪ Nothing comes for free in this world. You need to give up some thing in order to gain something. ▪ Making decisions requires comparing the costs and benefits of alternative courses of action. ▪ The OPPURTUNITY COST of an item is what you give up to get that item 13  ▪ Athletes who can earn Live Example millions if they drop out of school and play professional sports are well aware that their opportunity cost of college is very high Cricketing god Sachin Tendulkar decided to quit his education in order to play professional cricket for his country. 14  Question for Review ▪ You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. ▪ How can you compare the benefits to the costs? 15  SOLUTION : In a situation where benefits are psychological , it is difficult to compare benefits to costs to determine whether it is worth it. In order to decide whether going on a vacation is beneficial or not , we can either think how that money can be spent somewhere else – like spending money to buy a new mobile phone or we can think about the hard work we put in to earn the money which is needed to be spent on the vacation. By doing this we can understand the benefits of the vacation and think wisely before spending. 16 PRINCIPLE 3 17  Rational People Think at the Margin. ▪ A rational decision maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. 18  Life Example ▪ Ex : If you buy a used car, and plan to ▪ spend $10,000, but the car is only priced at $6,000, would you still buy it if it needed $5,000 in repairs? of course not because ▪ 1) you are a rational thinker and ▪ 2) you would end up spending more than you planned to. 19  Questions for Review:- ▪ What does it mean to think at the margin? It means to think about your next step forward. The word "marginal" means "additional." The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what the next or additional action means for you. 20 PRINCIPLE 4 21  People Respond to Incentives. ▪ Incentives: Something that induces a person to act ▪ It may be punishment or reward ▪ People responds to incentive because people make decision by comparing costs and benefits ▪ Incentive plays a central roles in study of economics. ▪ Incentives are crucial to analyzing how market work 22  Life Example ▪ When gas prices rise , consumers buy more hybrid cars and fewer gas guzzling SUVs. ▪ When cigarette taxes increase, teen smoking fall 23  Questions for Review ▪ A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only two years of benefits. ▪ a. How does this change affect the incentives for working? When welfare recipients who are able to work have their benefits cut off after two years ,they have greater incentive to find jobs than if their benefits were to last forever 24 ▪ b. How might this change represent a tradeoff: Between equality and efficiency the loss of benefits means that someone who can’t find a job will get no income at all, so the distribution of income will become less equal. But the economy will be more efficient, since welfare recipients have a greater incentive to find jobs. Thus the change in the law is one that increases efficiency but reduces equity. 25 PRINCIPLE 5 26  Trade Can Make Everyone Better Off ▪ Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services. 27  Questions For Review ▪ Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all the cooking and you did all the cleaning, would your chores take you more or less time than if you divided each task evenly? Give a similar example of how specialization and trade can make two countries both better off. 28  Answer ▪ By specializing in each task you and your roommate can finish the chores more quickly. If you divide each task equally, it would take more time to cook than it would take your roommate and it would take him more time to clean than it would take you. By specializing, you reduce the total time spent on chores. 29 ▪ Similarly countries can specialize and trade making both better off. For example, suppose it takes Spanish workers less time to make clothes than French workers and French workers can make wine more efficiently than Spanish workers. Then Spain and France both benefit if Spanish workers produce all the clothes and French workers produce all the wine then they exchange some wine for some clothes. 30 PRINCIPLE 6 31 Markets Are Usually a Good Way to Organize Economic Activity 32  In Market Economy ▪ Households Decide What to buy and who to work for. ▪ Firms decide what to produce and whom to hire. Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” ▪ Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions. 33  In Market Economy ▪ As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole. 34  Questions For Review ▪ Q: What does the “invisible hand” of the marketplace do? ▪ A:The “invisible hand” of the market place the idea that even though individuals and firms are all acting in their own self-interest , prices and the marketplace guide them to do what’s good for society as a whole. 35 PRINCIPLE 7 36 Governments Can Sometimes Improve Market Outcomes. ▪ When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution. 37  Life Example A dry cleaning factory can cause water pollution when they dispose off used chemicals. Government has a task of regulating, auditing and monitoring the activities of the market. Thus they can introduce regulating policies to protect the environment. 38  Question for Review ▪ Explain government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss? A) Regulating cable T.V prices ▪ #Efficiency-the market failure come from cable firm 39 ▪ B)Providing some poor people with vouchers that be used to buy food. #Equality ▪ C)Prohibiting smoking in public places #Efficiency – an externality arises because of smokes harm non-smokers 40 PRINCIPLE 8 41 ▪ “A Country’s Standard of Living Depends on its Ability to Produce Goods and Services” ▪ Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income. 42  Life Example ▪ The United States is a highly productive country ▪ Citizens of America are highly paid which grants them the capacity and ability to afford better standards of living ▪ They can buy more TV sets, cars and maintain better nutrition and healthcare 43  Question for Review ▪ In what ways is your standard of living different from that of your parents or grandparents when they were your age? ▪ Why have these changes occurred? 44  Answer ▪ Changes in standards of living over time is very large ▪ Reason being, differences in countries’ productivity over the years ▪ Growth rate of a nation’s productivity determines the growth rate of its average income ▪ Due to higher income earning capacity, citizens experience better standards of living ▪ With time, productivity of a country increases and provides better standard of living compared to our grandparents time. 45 PRINCIPLE 9 46  Prices Rise When the Government Prints ▪ When Too Much Money a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. 47  Life Example ▪ When there is a lot of money in circulation in the economy, then the income of the consumer rises and this will push up the demand for goods and services. If purchasing power increases it leads to excess demand the producer will not the able to fulfill the demand , and since excess doesn't exist in the market, the producer will increase the price. This will lead to inflation. 48  Question for Review ▪ What is inflation and how it effects? ▪ Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises each consumer buys fewer goods and services 49 PRINCIPLE 10 50 Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. ▪ Phillips curve: shows short-run trade-off b/w inflation & unemployment. ▪ Lower unemployment-Higher inflation. ▪ Inverse relation b/w unemployment & inflation. ▪ Monetary Policy - instruments of control. 51  Life Example ▪ During 2008 & 2009 US economy faced financial crisis. ▪ Failure in the financial system & downturn in Stock market. ▪ Failure lead to raise unemployment & fall in Income. ▪ Policymakers & President Obama –Reduced taxes & increased govt. expenditure ▪ Apex bank-USA increased money supply. ▪ Goal-reduction in unemployment 52  Question for Review Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch? 53  Answer ▪ If America save more and it lends to more spending on factories, their will be increase in productivity. Since with increase in no. of factories the requirement of worker will increase. Both the worker and owner will be benefited as owner will get more return on investment and worker’s will be paid more. There is no such free launch because when people save more they give up spending. They get higher income at the cost of buying fewer goods. 54 55  From 2005 to 2008 the price of oil in world oil markets skyrocketed, the result of limited supplies together with surging demand from robust world growth, especially in China. The price of gasoline in the United States rose from about $2 to about $4 a gallon. At the time, the news was filled with stories about how people responded to the increased incentive to conserve, sometimes in obvious ways, sometimes in less obvious ways. Here is a sampling of various stories: 56 57