Principles of Economics

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CHAPTER

1

Ten Principles of Economics

Economics
P RINCIP LES OF

N. Gregory Mankiw

Premium PowerPoint Slides by Ron Cronovich
© 2009 South-Western, a part of Cengage Learning, all rights reserved

In this chapter, look for the answers to these questions:
§ What kinds of questions does economics address? § What are the principles of how people make decisions?

§ What are the principles of how people interact? § What are the principles of how the economy as a whole works?

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What Economics Is All About
§ Scarcity: § Economics:
§ how people decide what to buy,
how much to work, save, and spend

§ how firms decide how much to produce,
how many workers to hire

§ how society decides how to divide its resources
between national defense, consumer goods, protecting the environment, and other needs TEN PRINCIPLES OF ECONOMICS
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The principles of HOW PEOPLE MAKE DECISIONS

HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs Principle #1: People Face Tradeoffs All decisions involve tradeoffs. Examples:

§ Going to a party the night before your midterm
leaves less time for studying.

§ Having more money to buy stuff requires working
longer hours, which leaves less time for leisure.

§ Protecting the environment requires resources
that could otherwise be used to produce consumer goods.
TEN PRINCIPLES OF ECONOMICS
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HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs Principle #1: People Face Tradeoffs

§ Society faces an important tradeoff:
efficiency vs. equality

§ Efficiency: § Equality: § Tradeoff:

TEN PRINCIPLES OF ECONOMICS

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2

HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is Principle #2: The Cost of Something Is What You Give Up to Get It What You Give Up to Get It

§ Making decisions requires comparing the costs
and benefits of alternative choices.

§ The opportunity cost of any item is § It is the relevant cost for decision making.

TEN PRINCIPLES OF ECONOMICS

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HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is Principle #2: The Cost of Something Is What You Give Up to Get It What You Give Up to Get It Examples: The opportunity cost of…
…going to college for a year

…seeing a movie

TEN PRINCIPLES OF ECONOMICS

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HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the Principle #3: Rational People Think at the Margin Margin Rational people

§ § make decisions by evaluating costs and benefits
of marginal changes

TEN PRINCIPLES OF ECONOMICS

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3

HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the Principle #3: Rational People Think at the Margin Margin Examples:

§ When a student considers whether to go to
college for an additional year, he compares

§ When a manager considers whether to increase
output, she compares
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TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS
Principle #4: People Respond to Incentives Principle #4: People Respond to Incentives

§ Incentive:

§ Rational people respond to incentives.
Examples: § When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs. § When cigarette taxes increase, teen smoking falls. TEN PRINCIPLES OF ECONOMICS

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Applying the principles
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 transmission works, $5700 if it doesn’t B. Blue book value is $6000 if transmission works, $5500 if it doesn’t 11

ACTIVE LEARNING 1

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The principles of HOW PEOPLE INTERACT

HOW PEOPLE INTERACT
Principle #5: Trade Can Make Everyone Principle #5: Trade Can Make Everyone Better Off Better Off

§ Rather than being self-sufficient,
people can specialize in producing one good or service and...
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