Principles of Microeconomics & Principles of Macroeconomics: Ch.1 Second Canadian Edition Chapter 1 Ten Principles of Economics © 2002 by Nelson, a division

Principles of Microeconomics & Principles of Macroeconomics: Ch.1 Second Canadian Edition

Chapter 1

Ten Principles of Economics

© 2002 by Nelson, a division of Thomson Canada Limited


Overview

Scarcity and EconomicsHow People Make DecisionsHow People InteractHow the Economy as a Whole

Works


The word Economy . . .

comes from a Greek word for

“One who manages a

household.”


A household and an economy face many...

Decisions?

Decisions?

Decisions?

Decisions?

Decisions?


Decisions

Who will work?

What to produce?

What resources to

use?

Who will we sell it to?

????

? ??


Scarcity...

… means that society has less to offer than people wish to have.

Managing society’s resources is important

because resources are scarce.


Economics is the study of how society manages its scarce resources

Economists study. . . …how people make decisions.

...how people interact with each other.

…the forces and trends that affect the economy as a whole.


Overview


Works


Ten Principles of Economics:

How People Make Decisions

People face tradeoffs. The cost of something is what you

give up to get it. Rational people think at the margin. People respond to incentives.


How People Make Decisions1. People face tradeoffs

To get one thing, we usually have to

give up another thing.Guns vs. Butter

Food vs. Clothing

Leisure Time vs. Work

Efficiency vs. Equity


How People Make Decisions1. People face tradeoffs

Efficiency means . . .

…getting the most you can from scarce resources.

Equity means . . .

…benefits of resources are distributed fairly among society.


How People Make Decisions2. The Cost of Something Is What You

Give Up to Get ItDecisions require comparing costs and

benefits of alternatives– Going to university vs. going to work

Opportunity Cost is what you give up from one alternative (choice) to get what you want (from another choice)


How People Make Decisions3. Rational People Think at the Margin

Marginal changes are small, incremental adjustments to an existing plan of action.– Comparing extra benefits and costs of a critical

choiceMarginal Benefits => MBMarginal Costs => MC


How People Make Decisions 4. People Respond to Incentives

Marginal changes in costs or benefits from decisions motivate people to respond.

Decision to choose one good over

another occurs when MB > MC.


Quick Quiz!How People Make Decisions

Identify and briefly explain the four principles of individual decision-making.


Overview


Works



How People InteractTrade can make

everyone better off.Markets are usually a

good way to organize economic activity.

Government can sometimes improve market outcomes.


How People Interact 5. Trade Can Make Everyone Better Off

Individuals gain from their ability to trade with others.

Competition results in gains from trading.

Trade allows one to specialize in what they do best.


How People Interact6. Markets Are Usually a Good Way to

Organize Economic Activity

In a Market Economy, households and business firms determine what to buy, who to work for, who to hire and what to produce.

Interaction between household and business is as if by an “invisible hand.”


How People Interact 7. Governments Can Sometimes Improve

Market Outcomes

Market failure results in inefficiency - failure of the “invisible hand.”

When the market fails (breaks down) the government intervenes to – promote Efficiency

– promote Equity


How People Interact 7. Governments Can Sometimes Improve

Market Outcomes

Market failure may be the result of of an externality, which is the impact of one person’s actions on the well-being of a bystander. (example: pollution)

Market power is the ability of a single person or small group to unduly influence market prices.


Quick Quiz!How People Interact

Identify and briefly explain the three principles of economic interactions.


Overview


Works



How the Economy as a Whole WorksA country’s standard of living

depends on its ability to produce goods and services.

Prices rise when the government prints too much money.

Society faces a short-run tradeoff between inflation and unemployment.


How the Economy as a Whole Works8. Standard of living depends on a

country’s production.Standard of Living may be measured

in different ways (e.g. personal income or total market value of a nation’s production.)– Differences in standard of living between

countries or even provinces is attributable to the productivity of the country or province.


How the Economy as a Whole Works8. Standard of living depends on a

country’s production.

Productivity is the amount of goods and services produced from each hour of a worker’s time.

Productivity => Standard of Living


How the Economy as a Whole Works9. Prices Rise When The Government

Prints Too Much Money

Inflation is an increase in the overall level of prices in the economy.– One cause of inflation is the growth in the

quantity of money.


How the Economy as a Whole Works10. Society Faces a Short-Run Tradeoff Between

Inflation and Unemployment

A Short-Run Tradeoff. You Choose.

This tradeoff is called the Phillips Curve.

InflationInflation UnemploymenUnemploymentt


Quick Quiz!How The Economy as a Whole Works

Identify and briefly explain the three

principles that describe how the

economy as a whole works.


Overview


Works

Documents

Principles of Microeconomics & Principles of Macroeconomics: Ch.1 Second Canadian Edition Chapter 1 Ten Principles of Economics © 2002 by Nelson, a division