Transcript TEN PRINCIPLES OF ECONOMICS

PowerPoint Presentations for
Principles of Macroeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa
TEN PRINCIPLES
OF ECONOMICS
Chapter 1
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TEN PRINCIPLES OF ECONOMICS
The word economy comes from the Greek
word for
“one who manages a household.”
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TEN PRINCIPLES OF ECONOMICS
The management of society’s resources
(e.g., people, land, buildings, machinery)
is important because resources are
scarce.
Scarcity: the limited nature of society’s
resources
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TEN PRINCIPLES OF ECONOMICS
Economics: the study of how society
manages its scarce resources
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HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
“There is no such thing as a free lunch.”
Efficiency: the property of society getting
the most it can from its scarce resources
Equity: the property of distributing
economic prosperity fairly among the
members of society
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HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something
Is What You Give Up to Get It
Opportunity cost: whatever must be given
up to obtain some item
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HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the
Margin
Rational people: people who systematically
and purposefully do the best they can to
achieve their objectives
Marginal changes: small incremental
adjustments to a plan of action
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HOW PEOPLE MAKE DECISIONS
Principle #4: People Respond to Incentives
 Incentive: something that
induces a person to act
Mark Zuckerberg understood
incentives.
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Active Learning
Discussion Questions
You are selling your 1996 Mustang. You have already spent
$1000 on repairs. At the last minute, the transmission dies.
You can pay $600 to have it repaired or sell the car “as is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.
A. Blue Book value is $6500 if the transmission works and
$5700 if it doesn’t,
B. Blue Book value is $6000 if the transmission works,
$5500 if it doesn’t.
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Active Learning
Answers
Cost of fixing transmission = $600
A. Blue Book value is $6500 if the transmission works, $5700 if
it doesn’t.
Benefit of fixing the transmission = $800 ($6500 – $5700).
It’s worthwhile to have the transmission fixed.
B. Blue Book value is $6000 if the transmission works, $5500 if
it doesn’t.
Benefit of fixing the transmission is only $500
Paying $600 to fix the transmission is not worthwhile.
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Active Learning
Answers
Observations:
 The $1000 you previously spent on repairs is irrelevant.
What matters is the cost and benefit of the marginal
repair
(the transmission).
 The change in incentives from scenario A to scenario B
caused your decision to change.
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QuickQuiz
Describe an important tradeoff you recently
faced.
Give an example of some action that has both
a monetary and nonmonetary opportunity
cost.
Describe an incentive your parents offered to
you in an effort to influence your behaviour.
HOW PEOPLE INTERACT
Principle #5: Trade Can Make Everyone
Better Off
Property rights: the ability of an individual to
own and exercise control over scarce
resources
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HOW PEOPLE INTERACT
Principle #6: Markets Are Usually
a Good Way to Organize
Economic Activity
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Goran Bogicevic/Shutterstock
 Market economy: an economy
that allocates resources through
the decentralized decisions of
many firms and households as
they interact in markets for goods
and services
HOW PEOPLE INTERACT
 In his 1776 book, Adam Smith
observed that households and firms
interacting in markets act as if they
are guided by an “invisible hand”
that leads them to desirable market
outcomes.
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Principle #6: Markets Are Usually
a Good Way to Organize
Economic Activity (continued)
HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes
Improve Market Outcomes
We need governments for two reasons:
1. To enforce property rights
 Property rights: the ability of an individual to
own and exercise control over scarce
resources
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HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes
Improve Market Outcomes (continued)
2. Because the invisible hand is powerful, but it
is not omnipotent
 There are two broad reasons for a government to
intervene in the economy:
1. The goal of efficiency
2. The goal of equity
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Active Learning
Discussion Questions
For each of the following situations, what is the
government’s role? Does the government’s
intervention improve the outcome?
a. Public schools for K-12
b. Workplace safety regulations
c. Public highways
d. Patent laws, which allow drug companies to
charge high prices for life-saving drugs
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HOW PEOPLE INTERACT
 The goal of efficiency
 Market failure: a situation in which a market left
on its own fails to allocate resources efficiently
 Externality: the impact of one person’s actions on
the well-being of a bystander
 The goal of equity
 Even when the invisible hand is yielding efficient
outcomes, it can nonetheless leave sizable
disparities in economic well-being.
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QuickQuiz
Why is a country better off not isolating
itself from all other countries?
Why do we have markets and,
according to economists, what roles
should government play in them?
HOW THE ECONOMY AS A WHOLE WORKS
Principle #8: A Country’s Standard of Living
Depends on Its Ability to Produce
Goods and Services
Productivity: the quantity of goods and
services produced from each hour of a
worker’s time
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HOW THE ECONOMY AS A WHOLE WORKS
Principle #9: Prices Rise When
the Government Prints
Too Much Money
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Thinkstock
 Inflation: an increase in the
overall level of prices in the
economy
 What causes inflation?
HOW THE ECONOMY AS A WHOLE WORKS
Principle #10: Society Faces a Short-Run
Tradeoff between Inflation and Unemployment
 This short-run tradeoff plays a key role in the
analysis of the business cycle.
 Business cycle: the irregular and largely
unpredictable fluctuations in economic activity,
as measured by the production of goods and
services or the number of people employed
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QuickQuiz
List and briefly explain the three principles
that describe how the economy as a
whole works.
TABLE 1.1:
Ten Principles of Economics
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Classroom Activity
Getting Dressed in the Global Economy
1. Where did your clothes come from?
2. Who worked to produce your clothes?
3. What things do you consider when buying a
garment?
4. Where were your clothes produced (what
countries)?
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