ch01 ten principles

7/25/2019 Ch01 Ten Principles

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PowerPoint Lecture Presentation

to accompany

Principles of Economics, Third EditionN. Gregory Mankiw

Prepared y Mark P. !arscig, "entral Missouri #tate $ni%ersity.


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&'NT()*$"T')N


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"opyright + -- #outh/0estern1Thomson Learning

&&Ten Principles ofEconomics


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Economy. . .

. . . The word economycomes from a Greek

word for one who manages a household.


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TEN PRINCIPLES OFECONOMICS

A household and an economy

face many decisions:

Who will work?

What goods and how many of them should beroduced?

What resources should be used in roduction?

At what rice should the goods be sold?


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!ociety and !carce "esources:

The management of society#s resources is

imortant because resources are scarce.

Scarcity. . . means that society has limited resources

and therefore cannot roduce all the goods and

ser$ices eole wish to ha$e.

%!kortur& $'sa( til hagfr)(i sem hinna d*ru fr)(a&+ar sem fengist er $i( $andam,l skortsins


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Economicsis the study of how society manages

its scarce resources.


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-ow eole make decisions.

eole face tradeoffs.

The cost of something is what you gi$e u to get it.

"ational eole think at the margin.

eole resond to incenti$es.


9/30"opyright + -- #outh/0estern1Thomson Learning


-ow eole interact with each other.

Trade can make e$eryone better off.

/arkets are usually a good way to organi0e

economic acti$ity. Go$ernments can sometimes imro$e economic

outcomes.




The forces and trends that affect how the

economy as a whole works.

The standard of li$ing deends on a country#s

roduction. rices rise when the go$ernment rints too much

money.

!ociety faces a short1run tradeoff between inflationand unemloyment.



Principle #1: People Face Tradeoffs.

There is no such thing as a free lunch2



Main! decisions re"ires $radin!

off one !oal a!ains$ ano$%er.

Principle #1: People Face Tradeoffs.

To get one thing& we usually ha$e to gi$e u

another thing.

Guns $. butter

3ood $. clothing

4eisure time $. work

5fficiency $. e6uity



Principle #1: People Face Tradeoffs

5fficiency $. 56uity

Efficiency*means society gets the most that it can

from its scarce resources.

Equity**means the benefits of those resources aredistributed fairly among the members of society.

% !kil$irkni%%!anngirni



Principle #&: T%e Cos$ of Some$%in! Is '%a$(o )i*e +p $o )e$ I$.

7ecisions re6uire comaring costs and benefits

of alternati$es.

Whether to go to college or to work? Whether to study or go out on a date?

Whether to go to class or slee in?

The opportunity costof an item is what yougi$e u to obtain that item.

%f8rnarkostna(ur



Principle #&: T%e Cos$ of Some$%in! Is '%a$(o )i*e +p $o )e$ I$.

4A 4aker basketball star

9obe ryant chose to

ski college and gostraight from high

school to the ros where

he has earned millions

of dollars.



People mae decisions ,y comparin!

cos$s and ,enefi$s a$ $%e mar!in.

Principle #-: Ra$ional People T%in a$ $%eMar!in.

Marginal changesare small& incremental%

ad;ustments to an e



Principle #: People Respond $o Incen$i*es.

/arginal changes in costs or benefits moti$ate

eole to resond.

The decision to choose one alternati$e o$er

another occurs when that alternati$e#s marginalbenefits e



Principle #/: Trade Can Mae E*eryone0e$$er Off.

eole gain from their ability to trade with one

another =hagnast af m*guleika a( eiga

$i(skiti>

ometition results in gains from trading.

Tradeallows eole to seciali0e in what they

do best.



Principle #: Mare$s 2re +sally a )ood'ay $o Or!ani3e Economic 2c$i*i$y.

A market economyis an economy that allocates

resources through the decentrali0ed decisions of

many firms and households as they interact in

markets for goods and ser$ices. -ouseholds decide what to buy and who to work

for.

3irms decide who to hire and what to roduce.



Principle #: Mare$s 2re +sally a )ood'ay $o Or!ani3e Economic 2c$i*i$y.

Adam !mith made the obser$ation that

households and firms interacting in markets act

as if guided by an in$isible hand.

ecause households and firms look at rices whendeciding what to buy and sell& they unknowingly

take into account the social costs of their actions.

As a result& rices guide decision makers to reachoutcomes that tend to ma



Principle #4: )o*ernmen$s Can Some$imesImpro*e Mare$ O$comes.

Market failureoccurs when the market fails toallocate resources efficiently.

When the market fails =breaks down>

go$ernment can inter$ene to romote efficiencyand e6uity.



Principle #4: )o*ernmen$s Can Some$imesImpro*e Mare$ O$comes.

/arket failure may be caused by

an externality&which is the imact of one erson or

firm#s actions on the well1being of a bystander.

7)mi& mengun 2 @egati$e e



Principle #5: T%e S$andard of Li*in! 6ependson a Con$ry7s Prodc$ion.

!tandard of li$ing may be measured in different

ways:

y comaring ersonal incomes.

y comaring the total market $alue of a nation#sroduction.




Almost all $ariations in li$ing standards are

e




!tandard of li$ing may be measured in different

ways:

y comaring ersonal incomes. y comaring the total market $alue of a nation#s

roduction.



Principle #8: Prices Rise '%en $%e)o*ernmen$ Prin$s Too Mc% Money.

nflation is an increase in the o$erall le$el ofrices in the economy.

Bne cause of inflation is the growth in the

6uantity of money.

When the go$ernment creates large 6uantities

of money& the $alue of the money falls.



Principle #19: Socie$y Faces a S%or$rnTradeoff 0e$;een Infla$ion and+nemploymen$. The hillis ur$eillustrates the tradeoff

between inflation and unemloyment:

nflationCnemloyment

t#s a short1run tradeoff2


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Smmary

When indi$iduals make decisions& they facetradeoffs among alternati$e goals.

The cost of any action is measured in terms of

foregone oortunities.

"ational eole make decisions by comaring

marginal costs and marginal benefits.

eole change their beha$ior in resonse to the

incenti$es they face.


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Smmary

Trade can be mutually beneficial.

/arkets are usually a good way of coordinating

trade among eole.

Go$ernment can otentially imro$e market

outcomes if there is some market failure or if

the market outcome is ine6uitable.


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Smmary

roducti$ity is the ultimate source of li$ingstandards.

/oney growth is the ultimate source of

inflation.

!ociety faces a short1run tradeoff between

inflation and unemloyment.

ch01 ten principles

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