A Lecture Presentation in PowerPoint
to Accompany
Economy. . .
Ten Principles of
Economics
Principles of Economics
Second Edition
by
N. Gregory Mankiw op
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. . . The word economy comes from a
Greek word for “one who manages a
household.”
Chapter 1
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Copyright © 2001 by Harcourt, Inc.
All rights reserved. Requests for permission to make copies of any part of the
work should be mailed to:
Prepared by Mark P. Karscig, Department of Economics &
Finance, Central Missouri State University.
Permissions Department, Harcourt College Publishers,
6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
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A household and an economy
face many decisions:
will work?
‹What goods and how many of them
should be produced?
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‹What resources should be used iny
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production?
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‹At what price should the goods
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Society and Scarce Resources:
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Scarcity . . .
‹Who
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Ten Principles of Economics
How People Make Decisions
‹How
people make decisions.
‹How
people interact with each other.
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forces and trends that affect
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economy as a whole.
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‹The
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Economists study. . .
Economics is the study of how
society manages its scarce
resources.
. . . means that society has limited
resources and therefore cannot
produce all the goods and services !
people wish to have.
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Economics
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The management of society’s
resources is important because
resources are scarce.
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œ People face tradeoffs.
 The cost of something is what you give
up to get it.
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ž Rational people think at the margin.
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Ÿ People respond to incentives.
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1
Ten Principles of Economics
How the Economy as a Whole Works
How People Interact
Trade can make everyone better off.
¡ Markets are usually a good way to
organize economic activity.
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¢ Governments can sometimes improve
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economic outcomes.
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1. People face tradeoffs.
‹
‹
Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity
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means society gets the most
that it can from its scarce resources.
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‹ Equity means the benefits of those y
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resources are distributed fairly among
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the members of society.
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2. The cost of something is
what you give up to get it.
The opportunity cost of an
item is what you give up to !
obtain that item. opy
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2. The cost of something is
what you give up to get it.
‹ Efficiency
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Efficiency v. Equity
Making decisions requires
o trading
off one goal againstDanother.
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“There is no such thing
as a free lunch!”
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1. People face tradeoffs.
To get one thing, we usually
have to give up another thing.
‹
£ The standard of living depends on a
country’s production.
¤ Prices rise when the government prints
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too much money.
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¥ Society faces a short-run tradeoff
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between inflation and unemployment.
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1. People face tradeoffs.
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‹
Ten Principles of Economics
to go to college or to work?
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to study or go out on a date?
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‹ Whether to go to class or sleep in?
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‹ Whether
‹ Whether
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3. Rational people think at the
margin.
Marginal changes are small, incremental
adjustments to an existing plan of action.
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People make decisions by comparing
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costs and benefits at the margin.
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Decisions require comparing costs and
benefits of alternatives.
4. People respond to incentives.
‹ Marginal
changes in costs or benefits
motivate people to respond.
‹ The decision to choose one alternative
over another occurs when that
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alternative’s marginal benefits exceed
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marginal costs!
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4. People respond to incentives.
5. Trade can make everyone
better off.
‹People
LA Laker basketball
star Kobe Bryant chose
to skip college and go
straight to the NBA
from high school when
offered a $10 million
contract.
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6. Markets are usually a good
way to organize economic
activity.
Adam Smith made the
observation that households
and firms interacting in y !
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markets act as if guided bycoan
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“invisible hand.”no
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a market economy, households
decide what to buy and who to work
for.
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‹Firms decide who to hire andcwhat
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to produce.
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6. Markets are usually a good
way to organize economic
activity.
‹ Because
households and firms look at prices
when deciding what to buy and sell, they
unknowingly take into account the social
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costs of their actions.
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‹ As a result, prices guide decision makers
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reach outcomes that tend to maximize
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welfare of society as a whole.
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7. Governments can
sometimes improve market
outcomes.
Market failure occurs when
the market fails to allocate !
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resources efficiently.cop
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7. Governments can
sometimes improve market
outcomes.
When the market fails (breaks
down) government can intervene to
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promote efficiency and equity.
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gain from their ability to
trade with one another.
‹Competition results in gains from
trading.
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‹Trade allows people to specialize
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what they do best.
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6. Markets are usually a good
way to organize economic
activity.
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7. Governments can
sometimes improve market
outcomes.
7. Governments can
sometimes improve market
outcomes.
Market failure may be caused by an
externality, which is the impact of
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one person or firm’s actions on the
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well-being of a bystander.
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Market failure may also be caused
by market power, which is the ability
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of a single person or firm to unduly
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influence market prices.
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8. The standard of living
depends on a country’s
production.
Standard of living may be measured in
different ways:
Almost all variations in living
standards are explained by !
differences in countries’ py
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productivities. t c
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‹ By
comparing personal incomes.
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‹ By comparing the total market value
t c of a
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nation’s production.
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9. Prices rise when the
government prints too much
money.
Inflation is an increase in the overall
level of prices in the economy.
‹ One
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cause of inflation is the growth in the
quantity of money.
‹ When the government creates large quantities
of money, the value of the money falls.
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The Phillips Curve illustrates the tradeoff
between inflation and unemployment:
ØInflation Ö ×Unemployment
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It’s a short-run tradeoff!
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‹People
can benefit by trading with
each other.
‹Markets are usually a good way of
coordinating trades.
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‹Government can potentially improve
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market outcomes.
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Productivity is the amount of goods
and services produced from each
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hour of a worker’s time.cop
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Higher productivity Ö HigherDstandard of living
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10. Society faces a short-run
tradeoff between inflation and
unemployment.
Summary
Summary
‹When
individuals make decisions,
they face tradeoffs.
‹Rational people make decisions by
comparing marginal costs and y !
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marginal benefits.
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Summary
‹A
country’s productivity determines
its living standards.
‹Society faces a short-run tradeoff
!
between inflation and
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unemployment.
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8. The standard of living
depends on a country’s
production.
8. The standard of living
depends on a country’s
production.
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