Transcript Mankiw: Brief Principles of Macroeconomics, Second Edition

Mankiw: Brief Principles of
Macroeconomics, Second
Edition (Harcourt, 2001)
Ch. 1: Ten Principles of Economics
What Is Economics?
• Economics tries to capture the rules of
rational choice.
• If choice is to be made then there must be
scarcity.
– Examples of scarcity are limited income,
limited resources, limited time…
• “So many books, so little time!” is an
economic problem.
Econ 202
Dr. Ugur Aker
2
Ten Principles of Economics
• How People Make Decisions.
– Principles 1-4.
• How People Interact.
– Principles 5-7.
• How the Economy as a Whole Works.
– Principles 8-10.
Econ 202
Dr. Ugur Aker
3
Principle #1: People Face Tradeoffs
• Choices usually require giving up
something else.
• This is true for individual and community
decisions.
• Sometimes tradeoffs involve a choice
between fairness and more wealth (equity
vs. efficiency).
Econ 202
Dr. Ugur Aker
4
Principle #2: Opportunity Cost
• The cost of something is not only the
payment but also what one has to give up.
• Opportunity cost is the true cost of an
action.
• Opportunity cost includes the hypothetical
cost of sacrificing the best alternative.
Econ 202
Dr. Ugur Aker
5
Principle #3: Thinking at the Margin
• Improvement to one’s condition can usually take
place by making marginal decisions.
• Marginal here means additional, extra.
• It is easier to identify and calculate the costs and
benefits of an additional work/leisure.
• This is the source of the maximization rule:
– Marginal benefit > Marginal cost => increase the
activity.
– Marginal benefit < Marginal cost => reduce the
activity.
Econ 202
Dr. Ugur Aker
6
Principle #4: People Respond to
Incentives
• When prices change, when new laws and
regulations are put in practice, costs and
benefits of actions also change forcing
different actions and behavior.
• Unintended consequences of legislation
may be more important because of the
changed incentives.
Econ 202
Dr. Ugur Aker
7
Principle #4: Trade Can Make
Everyone Better Off
• Self-sufficiency forces families, countries to use
their resources to produce a number of goods and
services that they are not suited for.
• The cost of those activities are very high.
• By concentrating on activities they are suited for
and produce cheaply, they can increase the ability
to obtain a higher amount of goods that are costly
to produce.
• Trade also increases the variety of choice.
Econ 202
Dr. Ugur Aker
8
Principle #6: Markets Are Usually
More Efficient Than Government
• Individual producers and individual consumers
know the costs and benefits of their actions
best.
• When prices are determined through the
interaction of buyers and sellers, each price
reflects the cost and benefit of the last unit
produced and consumed.
Econ 202
Dr. Ugur Aker
9
Principle #7: Governments Can
Sometimes Improve Markets
• Externalities lead to market failure. The
allocation of resources becomes non-optimal.
– Government (collective action) can improve the
outcome.
• Market power (monopoly) also leads to market
failure.
• Public goods may not be provided by the market
unless governments intervene.
Econ 202
Dr. Ugur Aker
10
Principle #8: Standard of Living in A
Country Depends on Productivity
• Productivity is the value of goods and services
produced in an hour by average worker.
• Increasing the amount of labor, amount of capital
or technology all increase the total amount of
goods and services produced, raising the standard
of living.
• Investment (increasing capital stock) and
improving technology both increase productivity.
Econ 202
Dr. Ugur Aker
11
Principle #9: Inflation Is The
Result of Fast Increase of Money
• An increase in the overall level of prices is
called inflation.
• Growth in the money supply is the culprit
for persistent inflation.
• Money is defined as any payment accepted
in exchange for goods, services, assets.
– In US it is currency outside the banks plus
checking account deposits.
Econ 202
Dr. Ugur Aker
12
Principle #10: Only in the Short-run
There Is a Trade-off Between Inflation
and Unemployment
• Because prices may not adjust to upward
pressure immediately, in the short-run,
output may increase because of higher
demand in the economy.
• Likewise, during high inflation, efforts to
lower the total demand in the economy may
first result in increasing unemployment and
after a while, in reducing inflation.
Econ 202
Dr. Ugur Aker
13