Econ Principles CH1.ppt

PRINCIPLES OF ECONOMICS Ten Principles of Economics (as a Discipline) Scarcity: Economists study situations where needs or wants exceed means. Therefore, people have to make choices. Rationality Guide people's choices or decisions. Systematically gauge all pros (benefit or "utility")...

PRINCIPLES OF ECONOMICS Ten Principles of Economics (as a Discipline) Scarcity: Economists study situations where needs or wants exceed means. Therefore, people have to make choices. Rationality Guide people's choices or decisions. Systematically gauge all pros (benefit or "utility") and cons ("cost“) Preferences Fixed and given that allow assignment of value to all options, and to choose the option that maximizes (net) utility.  Restrictions People face constrains that they cannot change themselves, and thus have to take as given Opportunity Cost Deciding in favor of one option always means deciding against some other option(s). The Economic Principle The application of rationality to situations of scarcity: Minimize cost OR maximize utility  Efficiency getting the maximum benefits from scarce resources Marginal Analysis Additional benefits vs additional costs Equilibrium Basic economic models deal with the comparison of two (or possibly more) equilibria (comparative statics). Game Theory Study situations of interdependence where people have incentives to think and behave strategically. Mankiw's "Ten Principles of Economics" How People Make Decisions People Face Tradeoffs. To get one thing, you have to give up something else. “There ain’t no such thing as a free lunch.” The Cost of Something is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions. Opportunity cost: whatever must be given up to obtain some item  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. People Respond to Incentives. Behavior changes when costs or benefits change. How People Interact Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he does best. Markets Are Usually a Good Way to Organize Economic Activity. "invisible hand" that leads the market to allocate resources efficiently. No central planner within the government. Governments Can Sometimes Improve Market Outcomes. through public policy How the Economy Works as A Whole 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. Prices Rise When the Government Prints Too Much Money. the value of the money falls, prices increase, requiring more of the same money to buy goods and services.  Society Faces a Short-Run Trade-off Between Inflation and Unemployment. Reducing inflation often causes a temporary rise in unemployment. Short-run effects of changes in taxes, government spending and monetary policy.