Chapter-1-Ten-Principles-of-Economics.pdf

N. GREGORY MANKIW PRINCIPLES OF MICROCONOMICS Eight Edition CHAPTER Ten Principles of 1 Economics...

N. GREGORY MANKIW PRINCIPLES OF MICROCONOMICS Eight Edition CHAPTER Ten Principles of 1 Economics PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 1 management system for classroom use.  Ten Principles of Economics, Part 1 Economy, “oikonomos” (Greek) – “One who manages a household” – Households and economies have much in common A household faces many decisions – Allocate scarce resources Taking into account: ability, effort, desire Society faces many decisions – Allocate resources and output © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 2 management system for classroom use.  Ten Principles of Economics, Part 2 Resources are scarce Scarcity: the limited nature of society’s resources – Society has limited resources and therefore cannot produce all the goods and services people wish to have Economics – The study of how society manages its scarce resources © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 3 management system for classroom use.  Ten Principles of Economics, Part 3 Economists study: – How people make decisions Work, buy, save, invest – How people interact with one another – The forces and trends that affect the economy as a whole Growth in average income Fraction of the population that cannot find work Rate at which prices are rising © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 4 management system for classroom use.  Ten Principles of Economics, Part 4 How people make decisions Principle 1: People face trade-offs Principle 2: The cost of something is what you give up to get it Principle 3: Rational people think at the margin Principle 4: People respond to incentives © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 5 management system for classroom use.  Ten Principles of Economics, Part 5 How people interact Principle 5: Trade can make everyone better off Principle 6: Markets are usually a good way to organize economic activity Principle 7: Governments can sometimes improve market outcomes © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 6 management system for classroom use.  Ten Principles of Economics, Part 6 How the economy as a whole works Principle 8: A country’s standard of living depends on its ability to produce goods and services Principle 9: Prices rise when the government prints too much money Principle 10: Society faces a short-run trade-off between inflation and unemployment © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 7 management system for classroom use.  How People Make Decisions, Part 1 Principle 1: People Face Trade-offs “There ain’t no such thing as a free lunch” – To get something that we like, we usually have to give up something else that we also like Making decisions – Requires trading off one goal against another: to study one more hour, give up one hour of TV © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 8 management system for classroom use.  How People Make Decisions, Part 2 Trade-offs – Students: how to allocate time – Parents: how to spend income Society faces trade-offs: – National defense and consumer goods (guns and butter) – Clean environment and high level of income – Efficiency and equality © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 9 management system for classroom use.  How People Make Decisions, Part 3 Efficiency – Society is getting the maximum benefits from its scarce resources – The size of the economic pie Equality – Distributing economic prosperity uniformly among the members of society – How the pie is divided into individual slices © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 10 management system for classroom use.  How People Make Decisions, Part 4 Efficiency and Equality trade-off – Public policies aimed at equalizing the distribution of economic well-being Welfare system, Unemployment insurance Individual income tax Achieve greater equality but reduce efficiency Recognizing that people face trade-offs – Does not by itself tell us what decisions they will or should make © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 11 management system for classroom use.  How People Make Decisions, Part 5 Principle 2: The Cost of Something Is What You Give Up to Get It People face trade-offs; making decisions: – Compare costs with benefits of alternatives – Need to include opportunity costs Opportunity cost – Whatever must be given up to obtain some item © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 12 management system for classroom use.  How People Make Decisions, Part 6 Principle 3: Rational People Think at the Margin Rational people – Systematically and purposefully do the best they can to achieve their objectives – Given the available opportunities Marginal changes – Small incremental adjustments to a plan of action © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 13 management system for classroom use.  How People Make Decisions, Part 7 Rational decision maker – Make decisions by comparing marginal benefits and marginal costs – Take action only if: Marginal benefits > Marginal costs “Is the marginal benefit of this call greater than the marginal cost?” © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 14 learning management system for classroom use.  How People Make Decisions, Part 8 Why is water so cheap, while diamonds are so expensive? – Water – needed to survive – Diamonds – not a necessity – A person’s willingness to pay for a good Based on the marginal benefit that an extra unit of the good would yield The marginal benefit depends on how many units a person already has © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 15 management system for classroom use.  How People Make Decisions, Part 9 Principle 4: People Respond to Incentives Incentive – Something that induces a person to act – Higher price Buyers consume less; Sellers produce more – Public policy Change costs or benefits Change people’s behavior Can have unintended consequences © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 16 management system for classroom use.  How People Make Decisions, Part 10 Seat belt law alters a driver’s cost–benefit calculation (Sam Peltzman, 1975) – Seat belts make accidents less costly (reduce the likelihood of injury or death) Reduce the benefits of slow, careful driving – People drive faster and less carefully: Larger number of accidents – Net result: little change in the number of driver deaths and an increase in the number of pedestrian deaths © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 17 learning management system for classroom use.  How People Interact, Part 1 Principle 5: Trade Can Make Everyone Better Off Trade – Allows each person to specialize in the activities he or she does best “For $5 a week you can watch baseball – Enjoy a greater variety of without being nagged goods and services to cut the grass!” © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 18 learning management system for classroom use.  How People Interact, Part 2 Principle 6: Markets Are Usually a Good Way to Organize Economic Activity Communist countries, central planning – Government officials (central planners) are in the best position to allocate the economy’s scarce resources What goods and services were produced How much was produced Who produced and consumed these goods and services © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 19 management system for classroom use.  How People Interact, Part 3 Market economy, allocation of resources – Through decentralized decisions of many firms and households – As they interact in markets for goods and services – Guided by prices and self-interest © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 20 management system for classroom use.  How People Interact, Part 4 Market economies – No one is looking out for the economic well-being of society as a whole – Have proven remarkably successful in organizing economic activity to promote overall economic well-being © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 21 management system for classroom use.  How People Interact, Part 5 Adam Smith’s “invisible hand” – Households and firms interacting in markets Act as if they are guided by an “invisible hand” Leads them to desirable market outcomes – Corollary: Government intervention Prevents the invisible hand’s ability to coordinate the decisions of the households and firms that make up the economy © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 22 learning management system for classroom use.  Adam Smith Would Have Loved Uber, Part 1 Strict controls in the market for taxis – Regulation of insurance and safety – Limit entry into the market: limited number of taxi medallions or permits – May determine the prices that taxis are allowed to charge – To keep unauthorized drivers off the streets and to prevent all drivers from charging unauthorized prices © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 23 management system for classroom use.  Adam Smith Would Have Loved Uber, Part 2 Uber, launched in 2009 – App for smartphones that connects passengers and drivers – Uber cars do not roam the streets looking for taxi-hailing pedestrians Not taxis; not subject to the same regulations But they offer much the same service – Often charge less than taxis – Drivers raise their prices significantly when there is a surge in demand © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 24 management system for classroom use.  Adam Smith Would Have Loved Uber, Part 3 Not everyone is fond of Uber – Traditional taxi drivers Economists love Uber – Increase consumer well-being Surge pricing – Increases the quantity of car services supplied when they are most needed – Allocate the services to those consumers who value them most highly © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 25 management system for classroom use.  How People Interact, Part 6 Principle 7: Governments Can Sometimes Improve Market Outcomes We need government – Enforce rules and maintain institutions that are key to a market economy – Need institutions to enforce property rights – Promote efficiency, avoid market failure – Promote equality, avoid disparities in economic wellbeing © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 26 learning management system for classroom use.  How People Interact, Part 7 Property rights – Ability of an individual to own and exercise control over scarce resources Market failure – Situation in which the market left on its own fails to allocate resources efficiently – Externalities – Market power © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 27 learning management system for classroom use.  How People Interact, Part 8 Externality – Impact of one person’s actions on the well-being of a bystander – Pollution Market power – Ability of a single economic actor (or small group of actors) to have a substantial influence on market prices © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 28 learning management system for classroom use.  How People Interact, Part 9 Disparities in economic wellbeing – Market economy rewards people According to their ability to produce things that other people are willing to pay for – Government intervention, public policies Aim to achieve a more equal distribution of economic well-being May diminish inequality Process far from perfect © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 29 management system for classroom use.  How Economy as a Whole Works, Part 1 Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services Large differences in living standards – Among countries: Average annual income, 2014: $55,000 (U.S.); $17,000 (Mexico); $13,000 (China); $6,000 (Nigeria) – Over time: In the U.S. incomes have historically grown about 2% per year © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 30 learning management system for classroom use.  How Economy as a Whole Works, Part 2 Explanation: differences in productivity Productivity – Quantity of goods and services produced from each unit of labor input – Higher productivity Higher standard of living – Growth rate of nation’s productivity Determines growth rate of its average income © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 31 learning management system for classroom use.  How Economy as a Whole Works, Part 3 Principle 9: Prices Rise When the Government Prints Too Much Money Inflation – An increase in the overall level of prices in the economy “Well it may have been Causes for large or persistent 68 cents when you got in inflation line, but it’s 74 cents now!” – Growth in quantity of money – Value of money falls © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 32 learning management system for classroom use.  How Economy as a Whole Works, Part 4 Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment Short-run effects of monetary injections: – Stimulates the overall level of spending and the demand for goods and services – Firms raise prices, hire more workers, produce more goods and services – Lower unemployment © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 33 learning management system for classroom use.  How Economy as a Whole Works, Part 5 Short-run trade-off between unemployment and inflation – Over a period of a year or two, many economic policies push inflation and unemployment in opposite directions – Key role – analysis of business cycle Business cycle – Fluctuations in economic activity – Such as employment and production © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved 34 learning management system for classroom use.  Table 1 Ten Principles of Economics How People Make Decisions 1: People Face Trade-offs 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 How People Interact 5: Trade Can Make Everyone Better Off 6: Markets Are Usually a Good Way to Organize Economic Activity 7: Governments Can Sometimes Improve Market Outcomes How the Economy as a Whole Works 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services 9: Prices Rise When the Government Prints Too Much Money 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 35 management system for classroom use.