Economics PRINCIPLES.ppt
- 1. PRINCIPLES OF By N. Gregory Mankiw PowerPoint slides prepared by: Andreea Chiritescu Eastern Illinois University Principles of Economics 5e N. Gregory Mankiw © 2009 Cengage Economics
- 2. Chapter Ten Principles of Economics 1
- 3. Ten Principles of Economics • Economy – “oikonomos” (Greek) –“One who manages a household” • Household - many decisions –Allocate scarce resources • Ability, effort, and desire • Society - many decisions –Allocate resources –Allocate output • Resources are scarce 3
- 4. Ten Principles of Economics • Scarcity - limited nature of society’s resources • Economics –Study of how society manages its scarce resources • Economists study: –How people make decisions –How people interact with one another –Analyze forces and trends that affect the economy as a whole 4
- 5. How People Make Decisions Principle 1: People face trade-offs • Making decisions –Trade off one goal against another –Student – time –Parents – income –Society • National defense vs. consumer goods • Clean environment vs. high level of income • Efficiency vs. equality 5
- 6. How People Make Decisions Principle 1: People face trade-offs • Efficiency –Society - maximum benefits from its scarce resources –Size of the economic pie • Equality –Benefits - uniformly distributed among society’s members –How the pie is divided into individual slices 6
- 7. How People Make Decisions Principle 2: The cost of something is what you give up to get it • People face trade-offs –Make decisions • Compare cost with benefits of alternatives –Opportunity cost • Whatever most be given up to obtain one item 7
- 8. How People Make Decisions Principle 3: Rational people think at the margin • Rational people –Systematically & purposefully do the best they can to achieve their objectives • Marginal changes –Small incremental adjustments to a plan of action • Rational decision maker – take action only if –Marginal benefits > Marginal costs 8
- 9. How People Make Decisions 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 9
- 10. How People Make Decisions Principle 4: People respond to incentives –Gasoline tax • Car size & fuel efficiency; carpool; public transportation –Unintended consequences • Policymakers fail to consider how their policies affect incentives 10
- 11. How People Interact Principle 5: Trade can make everyone better off • Trade –Specialization • Allows each person/country to specialize in the activities he/she does best –People/countries can buy a greater variety of goods and services at lower cost 11
- 12. How People Interact Principle 6: Markets are usually a good way to organize economic activity • Communist countries – central planning –Government officials (central planners) • Allocate economy’s scarce resources – Decided » What goods & services were produced » How much was produced » Who produced & consumed these goods & services • Theory: only the government could organize economic activity to promote economic well- being for the country as a whole 12
- 13. How People Interact Principle 6: Markets are usually a good way to organize economic activity • Market economy - allocates resources –Decentralized decisions of many firms and households –As they interact in markets for goods and services –Guided by prices and self interest –Adam Smith’s “invisible hand” 13
- 14. How People Interact Principle 7: Governments can sometimes improve market outcomes • We need government –Enforce the rules –Maintain institutions - key to market economy • Enforce property rights • Property rights –Ability of an individual to own and exercise control over scarce resources 14
- 15. How People Interact Principle 7: Governments can sometimes improve market outcomes • Government intervention –Change allocation of resources –To promote efficiency • Avoid market failure –To promote equality • Avoid disparities in economic wellbeing 15
- 16. How People Interact • Market failure –Situation in which the market on its own fails to produce an efficient allocation of resources • Causes for market failure –Externality • Impact of one person’s actions on the well-being of a bystander –Market power • Ability of a single person (or small group) to unduly influence market prices 16
- 17. How People Interact • Disparities in economic wellbeing –Market economy • Rewards people - ability to produce things that other people are willing to pay for –Government intervention • Public policies – May diminish inequality – Process far from perfect 17
- 18. How the Economy as a Whole Works Principle 8: A country’s standard of living depends on its ability to produce goods and services • Large differences in living standards –Among countries –Over time • Explanation: differences in productivity 18
- 19. How the Economy as a Whole Works • Productivity –Quantity of goods & 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 19
- 20. How the Economy as a Whole Works Principle 9: Prices rise when the government prints too much money • Inflation –An increase in the overall level of prices in the economy • Causes for large / persistent inflation –Growth in quantity of money • Value of money falls 20
- 21. How the Economy as a Whole Works Principle 10: Society faces a short-run trade-off between inflation and unemployment • Short-run effects of monetary injections: –Stimulates - overall level of spending –Higher demand for goods and services –Firms – raise prices; hire more workers; produce more goods and services –Lower unemployment • Short-run tradeoff between inflation and unemployment 21
- 22. How the Economy as a Whole Works Principle 10: Society faces a short-run trade-off between inflation and unemployment • Short-run trade-off between unemployment and inflation –Key role – analysis of business cycle • Business cycle –Fluctuations in economic activity • Employment • Production 22
- 23. Table Ten principles of economics 1 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 23