C1_Introduction_Ten Principles of Economics.pptx.pdf

Wojciech Gerson (1831-1901) Introduction to Economics © 2015 C...

Wojciech Gerson (1831-1901) Introduction to Economics © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Introduction What kinds of questions does economics address? Economics is the study of people and choices The study of human behavior © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Expectations from this course? to learn the economic way of thinking, to understand society, to understand global affairs, and to be an informed voter. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  What Economics Is All About ▪ Scarcity: the limited nature of society’s resources ▪ Economics: the study of how society manages its scarce resources, e.g. ▪ how people decide what to buy, how much to work, save, and spend ▪ how firms decide how much to produce, how many workers to hire ▪ how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 3 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  CHAPTER 1 Wojciech Gerson (1831-1901) Ten Principles of Economics © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The principles of HOW PEOPLE MAKE DECISIONS ©lithian/Shutterstock.com  PRINCIPLE 1 People Face Tradeoffs All decisions involve tradeoffs. Examples: ▪ Going to a party the night before your midterm leaves less time for studying. ▪ Having more money to buy stuff requires working longer hours, which leaves less time for leisure. ▪ Country’s protection requires resources that could otherwise be used to produce consumer goods. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 6 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 1 People Face Tradeoffs ▪ Society faces an important tradeoff: efficiency vs. equality ▪ Efficiency: when society gets the most from its scarce resources ▪ Equality: when prosperity is distributed uniformly among society’s members ▪ Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.” © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 7 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 2 The Cost of Something Is What You Give Up to Get It ▪ Making decisions requires comparing the costs and benefits of alternative choices. ▪ The opportunity cost of any item is whatever must be given up to obtain it. ▪ It is the relevant cost for decision making. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 8 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 2 The Cost of Something Is What You Give Up to Get It Examples: The opportunity cost of… …going to college for a year is not just the tuition, books, and fees, but also the foregone wages. …watching a movie is not just the price of the ticket, but the value of the time you spend in the theater. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 9 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 3 Rational People Think at the Margin Rational people ▪ systematically and purposefully do the best they can to achieve their objectives. ▪ make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 10 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 3 Rational People Think at the Margin Examples: ▪ When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education. ▪ When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 11 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 4 People Respond to Incentives ▪ Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. ▪ Rational people respond to incentives. Examples: ▪ When petrol prices rise, consumers buy more hybrid cars and fewer petrol guzzling SUVs. ▪ When cigarette taxes increase, teen smoking falls. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 12 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The principles of HOW PEOPLE INTERACT ©Pressmaster/Shutterstock.com  PRINCIPLE 5 Trade Can Make Everyone Better Off ▪ Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. ▪ Countries also benefit from trade and specialization: ▪ Get a better price abroad for goods they produce ▪ Buy other goods more cheaply from abroad than could be produced at home © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 14 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 6 Markets Are Usually A Good Way to Organize Economic Activity ▪ Market: a group of buyers and sellers (need not be in a single location) ▪ “Organize economic activity” means determining ▪ what goods to produce ▪ how to produce them ▪ how much of each to produce ▪ who gets them © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 15 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 6 Markets Are Usually A Good Way to Organize Economic Activity ▪ A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. ▪ Famous insight by Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 16 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 6 Markets Are Usually A Good Way to Organize Economic Activity ▪ The invisible hand works through the price system: ▪ The interaction of buyers and sellers determines prices. ▪ Each price reflects the good’s value to buyers and the cost of producing the good. ▪ Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 17 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 7 Governments Can Sometimes Improve Market Outcomes ▪ Important role for govt: enforce property rights (with police, courts) ▪ People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 18 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 7 Governments Can Sometimes Improve Market Outcomes ▪ Market failure: when the market fails to allocate society’s resources efficiently ▪ Causes of market failure: ▪ Externalities, when the production or consumption of a good affects bystanders (e.g. pollution) ▪ Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly) ▪ Public policy may promote efficiency. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 19 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 7 Governments Can Sometimes Improve Market Outcomes ▪ Govt may alter market outcome to promote equity. ▪ If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 20 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The principles of HOW THE ECONOMY AS A WHOLE WORKS ©nopporn/Shutterstock.com  PRINCIPLE 8 A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services ▪ Huge variation in living standards across countries and over time: ▪ Average income in rich countries is more than ten times average income in poor countries. ▪ The U.S. standard of living today is about eight times larger than 100 years ago. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 22 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 8 A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services ▪ The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor. ▪ Productivity depends on the equipment, skills, and technology available to workers. ▪ Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 23 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 9 Prices Rise When the Government Prints Too Much Money ▪ Inflation: increases in the general level of prices. ▪ In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. ▪ The faster the govt creates money, the greater the inflation rate. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 24 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  PRINCIPLE 10 Society Faces a Short-run Tradeoff Between Inflation and Unemployment ▪ In the short-run (1–2 years), many economic policies push inflation and unemployment in opposite directions. ▪ Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 25 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary The principles of decision making are: People face tradeoffs. The cost of any action is measured in terms of foregone opportunities. Rational people make decisions by comparing marginal costs and marginal benefits. People respond to incentives. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary The principles of interactions among people are: Trade can be mutually beneficial. Markets are usually a good way of coordinating trade. Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary The principles of the economy as a whole are: Productivity is the ultimate source of living standards. Money growth is the ultimate source of inflation. Society faces a short-run tradeoff between inflation and unemployment. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.