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PRINCIPLES OF ECONOMICS

1 0ECONOMICS ASSIGNMENT – CIA 3

Kinan

Raj

Nirvan

Akshay

Manuel

TrilokeshRakshit

Saketh

Banrilang

Chinmaya

Sarvesh

Group Members

INTRODUCTION

PRINCIPLES

EXAMPLES

QUESTIONS

ANSWERS

Topics of Discussion:-

WHO IS MANKIW

WHAT IS ECONOMICS

10 PRINCIPLES OF ECONOMICS

APPLICATION OF PRINCIPLES

What is Economics

The branch of knowledge concerned with the production, consumption, and transfer of

wealth.

Nicholas Gregory Mankiw

• American macroeconomist and, Chairman and Professor of Economics at Harvard University.

• Mankiw was chairman of the Council of Economic Advisers under President George W. Bush

• In 2006, he became an economic adviser to Mitt Romney 

• Ranked the number one economics blog by US economics professors

• He is also author of the best-selling textbook Principles of Economics, 

Nicholas Gregory Mankiw

Principle 1

People Face Trade Offs

Trade off is a situation that

involves losing one quality or aspect of something in return for gaining another quality or aspect.

Society faces trade off between Efficiency & Equity

- Efficiency:- society getting the most from its scarce resources.

- Equity:- Distributing economic prosperity fairly among the individuals of the society.

Life Example

A student faces a trade off between studying for exam or to watch a much awaited movie.

Question for Review

Describe some of the trade-offs faced by each of the following:

a.a family deciding whether to buy a new car

A family faces a trade off whether to buy a car or spend the money on savings for meeting the future needs such as for higher education for their children.

B) a member of Congress deciding how much to spend on national parks

In this case the member of congress faces a trade off whether to spend much on national parks or to use the money for the up liftment of other services by the government to the society

Principle 2

The Cost of Something is What You Give up to get it

Nothing comes for free in this world. You need to give up some thing in order to gain something.

The OPPURTUNITY COST of an item is what you give up to get that item.

Making decisions requires comparing the costs and benefits of alternative courses of action.

Cricketing god Sachin Tendulkar decided to quit his education in order to play professional cricket for his country.

Athletes who can earn millions if they drop out of school and play professional sports are well aware that their opportunity cost of college is very high

Life Example

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You are trying to decide whether to take avacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured indollars, but the benefits of the vacation are psychological.

How can you compare the benefits to the costs?

Question for Review

SOLUTION : In a situation where benefits are psychological , it is difficult to compare benefits to costs to determine whether it is worth it. In order to decide whether going on a vacation is beneficial or not , we can either think how that money can be spent somewhere else – like spending money to buy a new mobile phone or we can think about the hard work we put in to earn the money which is needed to be spent on the vacation. By doing this we can understand the benefits of the vacation and think wisely before spending.

Principle 3

A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.

Rational People Think at the Margin.

+Life Example

Ex :  If you buy a used car, and plan to spend $10,000, but the car is only priced at $6,000, would you still buy it if it needed $5,000 in repairs? of course not because 1) you are a rational thinker and 2) you would end up spending more than you planned to.

+Questions for Review:-What does it mean to think at the margin?

It means to think about your next step forward. The word "marginal" means "additional." The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what the next or additional action means for you.

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Principle 4

People Respond to Incentives.

Incentives: Something that induces a person to act

It may be punishment or reward

People responds to incentive because people make decision by comparing costs and benefits

Incentive plays a central roles in study of economics.

Incentives are crucial to analyzing how market work

+Life Example

When gas prices rise , consumers buy more hybrid cars and fewer gas guzzling SUVs.

When cigarette taxes increase, teen smoking fall

+Questions for Review

A 1996 bill reforming the federal government’santipoverty programs limited many welfarerecipients to only two years of benefits.

a. How does this change affect the incentivesfor working?

When welfare recipients who are able to work have their benefits cut off after two years ,they have greater incentive to find jobs than if their benefits were to last forever

+b. How might this change represent a trade-off: Between equality and efficiencythe loss of benefits means that someone who can’t find a job will get no income at all, so the distribution of income will become less equal. But the economy will be more efficient, since welfare recipients have a greater incentive to find jobs. Thus the change in the law is one that increases efficiency but reduces equity.

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Principle 5

Trade allows each person to specialize in the activities he or she does best. By trading with

others, people can buy a greater variety of goods or services.

Trade Can Make Everyone Better Off

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Your roommate is a better cook than you are,but you can clean more quickly than yourroommate can. If your roommate did all thecooking and you did all the cleaning, wouldyour chores take you more or less time than ifyou divided each task evenly? Give a similarexample of how specialization and trade canmake two countries both better off.

Questions For Review

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By specializing in each task you and your roommate can finish the chores more quickly. If you divide each task equally, it would take more time to cook than it would take your roommate and it would take him more time to clean than it would take you. By specializing, you reduce the total time spent on chores.Similarly countries can specialize and trade making both better off. For example, suppose it takes Spanish workers less time to make clothes than French workers and French workers can make wine more efficiently than Spanish workers. Then Spain and France both benefit if Spanish workers produce all the clothes and French workers produce all the wine then they exchange some wine for some clothes.

Answer

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Markets Are Usually a Good

Way to Organize Economic Activity

PRINCIPLE-6

DEFINITION

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.

In Market Economy

Households Decide What to buy and who to work for.Firms decide what to produce and whom to hire.

Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.”Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.

+Questions For Review

Q: What does the “invisible hand” of the marketplace do?

A:The “invisible hand” of the market place the idea that even though individuals and firms are all acting in their own self-interest , prices

and the marketplace guide them to do what’s good for society as a whole.

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Principle 7

Governments Can Sometimes Improve Market Outcomes.When a market fails

to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution.

+Life Example

A dry cleaning factory can cause water pollution when they dispose off used chemicals. Government has a task of regulating, auditing and monitoring the activities of the market. Thus they can introduce regulating policies to protect the environment.

+Question for ReviewExplain government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss?

A) Regulating cable T.V prices #Efficiency-the market failure come from cable firm

+B)Providing some poor people with vouchers that be used to buy food.

#Equality

C)Prohibiting smoking in public places

#Efficiency – an externality arises because of smokes harm non-smokers

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Principle 8

Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income.

“A Country’s Standard of Living Depends on its

Ability to Produce Goods and Services”

+Life Example

• The United States is a highly productive country

• Citizens of America are highly paid which grants them the capacity and ability to afford better standards of living

• They can buy more TV sets, cars and maintain better nutrition and healthcare

+Question for Review

• In what ways is your standard of living different from that of your parents or grandparents when they were your age?

• Why have these changes occurred?

+Answer

• Changes in standards of living over time is very large

• Reason being, differences in countries’ productivity over the years

• Growth rate of a nation’s productivity determines the growth rate of its average income

• Due to higher income earning capacity, citizens experience better standards of living

• With time, productivity of a country increases and provides better standard of living compared to our grandparents time.

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Principle 9

When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.

Prices Rise When the Government Prints Too Much

Money

+Life Example

When there is a lot of money in circulation in the economy, then the income of the consumer rises and this will push up the demand for goods and services. If purchasing power increases it leads to excess demand the producer will not the able to fulfill the demand , and since excess doesn't exist in the market, the producer will increase the price. This will lead to inflation.

+Question for Review

What is inflation and how it effects?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises each consumer buys fewer goods and services

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Principle 10

Society Faces a Short-Run Tradeoff

Between Inflation and Unemployment.• Phillips curve: shows short-run trade-

off b/w inflation & unemployment.

• Lower unemployment-Higher inflation.• Inverse relation b/w unemployment &

inflation.• Monetary Policy - instruments of

control.

+Life Example

During 2008 & 2009 US economy faced financial

crisis.

Failure in the financial system & downturn in

Stock market.

Failure lead to raise unemployment & fall in

Income.

Policymakers & President Obama –Reduced taxes

& increased govt. expenditure

Apex bank-USA increased money supply.

Goal-reduction in unemployment

+Question for Review

Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?

+Answer

If America save more and it lends to more spending on factories, their will be increase in productivity. Since with increase in no. of factories the requirement of worker will increase. Both the worker and owner will be benefited as owner will get more return on investment and worker’s will be paid more. There is no such free launch because when people save more they give up spending. They get higher income at the cost of buying fewer goods.

Case StudyFrom 2005 to 2008 the price of oil in world oil markets skyrocketed, the result of limited supplies together with surging demand from robust world growth, espe- cially in China. The price of gasoline in the United States rose from about $2 to about $4 a gallon. At the time, the news was filled with stories about how people responded to the increased incentive to conserve, sometimes in obvious ways, sometimes in less obvious ways. Here is a sampling of various stories:

Thank you!!