A Lecture Presentation in PowerPoint

to Accompany Economy. . .
Ten Principles of
Economics . . . The word economy comes from a
Principles of Economics
Greek word for “one who manages a
Second Edition
household.”
y! y!
by
Chapter 1
N. Gregory Mankiw op op
o tc o tc
n Copyright © 2001 by Harcourt, Inc. n
Prepared by Mark P. Karscig, Department of Economics & Do All rights reserved. Requests for permission to make copies of any part of the
work should be mailed to: Do
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: Society and Scarce Resources: Scarcity . . .
‹Who will work?
‹What goods and how many of them The management of society’s . . . means that society has limited
should be produced? resources and therefore cannot
resources is important because
‹What resources should be used iny
! y!
produce all the goods and services !
o p resources are scarce.
p people wish to have. py
production? c co tc
o
n ot be
‹At what price should the goods n o t
no
sold? Do Do Do
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Economists study. . . Ten Principles of Economics

Economics
‹How people make decisions. How People Make Decisions
Economics is the study of how
society manages its scarce œ People face tradeoffs.
‹How people interact with each other.  The cost of something is what you give
y! y! y!
resources.
up to get it.
p p op
t co ‹The o
t c the
forces and trends that affect c
ž Rational people think at the margin.
t
no economy as a whole. no Ÿ People respond to incentives.no
Do Do Do
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1
 Ten Principles of Economics Ten Principles of Economics
1. People face tradeoffs.
How People Interact How the Economy as a Whole Works

  Trade can make everyone better off. £ The standard of living depends on a “There is no such thing
country’s production.
¡ Markets are usually a good way to as a free lunch!”
organize economic activity. y! ¤ Prices rise when the government printsy! y!
cop too much money.
c op op
¢ Governments can sometimes improve
t ot
¥ Society faces a short-run tradeoff tc
economic outcomes. no on
between inflation and unemployment. n o
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1. People face tradeoffs. 1. People face tradeoffs. 2. The cost of something is

To get one thing, we usually what you give up to get it.
have to give up another thing. Efficiency v. Equity
‹ Guns v. butter Decisions require comparing costs and
‹ Efficiency means society gets the most benefits of alternatives.
‹ Food v. clothing that it can from its scarce resources.
y! ! !
‹ Whether to go to college or to work?
‹ Leisure time v. work ‹ Equity means the benefits of those y
‹ Efficiency v. equity op o p ‹ Whether to study or go out on a date?
o py
tc c c
resources are distributed fairly among
no the members of society. ot n ot
‹ Whether to go to class or sleep in?
n
o trading
Making decisions requires
Do Do
off one goal againstDanother.
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2. The cost of something is 3. Rational people think at the 4. People respond to incentives.
what you give up to get it. margin.

Marginal changes are small, incremental ‹ Marginal changes in costs or benefits

adjustments to an existing plan of action. motivate people to respond.
The opportunity cost of an ‹ The decision to choose one alternative
item is what you give up to !
y! !
over another occurs when that
obtain that item. opy p alternative’s marginal benefits exceedpyits
tc co
People make decisions by comparing
marginal costs! co
n o ot
costs and benefits at the margin.
n
t
n o
Do Do Do
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2
 5. Trade can make everyone 6. Markets are usually a good
4. People respond to incentives. better off. way to organize economic
activity.
‹People gain from their ability to
LA Laker basketball trade with one another.
star Kobe Bryant chose ‹In a market economy, households
to skip college and go ‹Competition results in gains from decide what to buy and who to work
straight to the NBA
y! trading. y! for. y!
from high school when
op op in
‹Trade allows people to specialize op
tc
offered a $10 million
o t c ‹Firms decide who to hire andcwhat
t
contract. n what they do best. no to produce. no
Do Do Do
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6. Markets are usually a good 6. Markets are usually a good

way to organize economic way to organize economic 7. Governments can
activity. activity. sometimes improve market
outcomes.
‹ Because households and firms look at prices
Adam Smith made the when deciding what to buy and sell, they When the market fails (breaks
observation that households unknowingly take into account the social
and firms interacting in y ! ! y!
down) government can intervene to
p
markets act as if guided bycoan
costs of their actions.
o py op
promote efficiency and equity.
t c to
‹ As a result, prices guide decision makers
tc
“invisible hand.”no ot the
reach outcomes that tend to maximize
n no
Do o
welfare of society as a whole.
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7. Governments can 7. Governments can 7. Governments can

sometimes improve market sometimes improve market sometimes improve market
outcomes. outcomes. outcomes.

Market failure may be caused by an Market failure may also be caused

Market failure occurs when externality, which is the impact of by market power, which is the ability
the market fails to allocate ! !
y py
one person or firm’s actions on the y!
of a single person or firm to unduly
resources efficiently.cop co
well-being of a bystander. cop
influence market prices.
n ot n ot t
n o
Do Do Do
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3
 8. The standard of living 8. The standard of living
8. The standard of living
depends on a country’s depends on a country’s
depends on a country’s
production. production.
production.
Standard of living may be measured in
Almost all variations in living Productivity is the amount of goods
different ways: standards are explained by !
‹ By comparing personal incomes. y! differences in countries’ py
and services produced from each y!
op o hour of a worker’s time.cop
o t c of a
‹ By comparing the total market value productivities. t c
o t
nation’s production. n n no
Do Do o
Higher productivity Ö HigherDstandard of living
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9. Prices rise when the 10. Society faces a short-run

government prints too much tradeoff between inflation and Summary
money. unemployment.
‹When individuals make decisions,
Inflation is an increase in the overall The Phillips Curve illustrates the tradeoff they face tradeoffs.
level of prices in the economy. between inflation and unemployment: ‹Rational people make decisions by
y! ! comparing marginal costs and y !
‹ One cause of inflation is the growth in the
quantity of money.
op py
ØInflation Ö ×Unemployment p
‹ When the government creates large quantities
tc co marginal benefits. co
of money, the value of the money falls. n o n ot
It’s a short-run tradeoff!
n ot
Do Do Do
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Summary Summary

‹People can benefit by trading with ‹A country’s productivity determines

each other. its living standards.
‹Markets are usually a good way of ‹Society faces a short-run tradeoff
coordinating trades. y! between inflation and
py
!
cop
‹Government can potentially improve unemployment. co
t ot
market outcomes. no n
Do Do
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