Mi_Ch_1_Ten_Principles_of_Economics (1).ppt
- 1. 1 © 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. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
- 2. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 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. 2
- 3. Ten Principles of Economics • Economy, “oikonomos” (Greek) –“One who manages a household” –Households and economies have much in common • Households face many decisions –Allocate scarce resources • Ability, effort, and desire • Society faces many decisions –Allocate resources and output © 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. 3
- 4. Ten Principles of Economics • 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 –How society manages its scarce resources –How people make decisions © 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. 4
- 5. Ten Principles of Economics • Economists study: –How people make decisions • Work, buy, save, invest –How people interact with one another –Analyze 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 © 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. 5
- 6. 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 © 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. 6
- 7. Ten Principles of Economics • 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 © 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. 7
- 8. Ten Principles of Economics • 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 © 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. 8
- 9. How People Make Decisions, #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 –Trade off one goal against another © 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. 9
- 10. How People Make Decisions, #1 • Trade offs –Students: time –Parents: income –Society • National defense vs. consumer goods (guns vs. butter) • Clean environment vs. high level of income • Efficiency vs. equality © 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. 10
- 11. How People Make Decisions, #1 • Efficiency –Society getting the maximum benefits from its scarce resources –Size of the economic pie • Equality –Distributing economic prosperity uniformly among the members of society –How the pie is divided into individual slices © 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. 11
- 12. How People Make Decisions, #2 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 must be given up to obtain some item © 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. 12
- 13. How People Make Decisions, #3 Principle 3: Rational people think at the margin • Rational people –Systematically and purposefully do the best they can to achieve their objectives • Marginal changes –Small incremental adjustments to a plan of action © 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. 13
- 14. How People Make Decisions, #3 • Rational decision maker –Make decisions by comparing marginal benefits and marginal costs –Take action only if: • Marginal benefits > Marginal costs © 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. “Is the marginal benefit of this call greater than the marginal cost?” 14
- 15. How People Make Decisions, #4 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 © 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. 15
- 16. The Incentive Effects of Gasoline Prices • 2005 to 2008, price of oil in world oil markets skyrocketed –Limited supplies –Surging demand from robust world growth –Price of gasoline in the United States rose from about $2 to about $4 a gallon © 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. 16
- 17. The Incentive Effects of Gasoline Prices • Increased incentive to conserve gas –Smaller cars, scooters, bicycles, mass transit –Camels (India) –New, more fuel-efficient aircraft • Airbus A320 and Boeing 737 –Moving near an Amtrak station –Online courses –Sean “Diddy” Combs - flying on commercial airlines © 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. 17
- 18. How People Interact, #5 Principle 5: Trade can make everyone better off • Trade –Allows each person to specialize in the activities he or she does best –Enjoy a greater variety of goods and services at lower cost © 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. “For $5 a week you can watch baseball without being nagged to cut the grass!” 18
- 19. How People Interact, #6 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 – What goods and services were produced – How much was produced – Who produced and consumed these goods and services © 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. 19
- 20. How People Interact, #6 • 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 © 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. 20
- 21. How People Interact, #6 • 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 © 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. 21
- 22. How People Interact, #7 Principle 7: Governments can sometimes improve market outcomes • We need government –Enforce rules and maintain institutions that are key to a market economy –Enforce property rights –Promote efficiency, avoid market failure –Promote equality, avoid disparities in economic wellbeing © 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. 22
- 23. How People Interact, #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 © 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. 23
- 24. How People Interact, #7 • 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 © 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. 24
- 25. How People Interact, #7 • 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 © 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. 25
- 26. How the Economy as a Whole Works, #8 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 • Average annual income, 2011 –$48,000 (U.S.); $9,000 (Mexico) –$5,000 (China); $1,200 (Nigeria) © 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. 26
- 27. How the Economy as a Whole Works, #8 • 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 © 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. 27
- 28. How the Economy as a Whole Works, #9 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 or persistent inflation – Growth in quantity of money – Value of money falls © 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. 28 “Well it may have been 68 cents when you got in line, but it’s 74 cents now!”
- 29. How the Economy as a Whole Works, #10 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 • Higher demand for goods and services –Firms – raise prices; hire more workers; produce more goods and services –Lower 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. 29
- 30. How the Economy as a Whole Works, #10 • Short-run trade-off between unemployment and inflation –Key role – analysis of business cycle • Business cycle –Fluctuations in economic activity • Employment • Production © 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. 30
- 31. Table 1 © 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. Ten Principles of Economics 31