MIRPUR UNIVERSITY OF SCIENCE AND TECHNOLOGY

DEPARMENT OF SOFTWARE ENGINEERING

SE-361 Software Engineering Economics 1

 Ten Principles of Economics
(Lecture # 03)
CLO PLO
1 1

Engr. Samina Fazilat

(Junior Lecturer)

SE-361 Software Engineering Economics

Date: April 23, 2020

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 Ten Principles of Economics

How People Make Decisions

1. People face tradeoffs.
2. The cost of something is what you
give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.

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 Ten Principles of Economics
How People Interact
5. Trade can make everyone better off.
6. Markets are usually a good way to
organize economic activity.
7. Governments can sometimes
improve economic outcomes.

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 Ten Principles of Economics
How the Economy as a Whole
Works
8. The standard of living depends on a
country’s production.
9. Prices rise when the government
prints too much money.
10. Society faces a short-run tradeoff
between inflation and unemployment.

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 1. People face tradeoffs.

 Trade off is a situation that

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

 “There is no such
thing as a free lunch!”

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 1. People face tradeoffs.

•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.
Making decisions requires trading off one goal against another.

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 1. People face tradeoffs.
Example

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 2. The cost of something is what you
give up to get it.

 Decisions require comparing costs

and benefits of alternatives.

u Whether to go to college or to work?

u Whether to study or go out to play game?
u Whether to go to class or sleep in?

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 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 opportunity cost of an item is
what you give up to obtain that
item.

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 3. Rational people think at the margin.

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

People make decisions by comparing costs and benefits at

the margin.

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 3. Rational people think at the
margin.
• 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
• you are a rational thinker
and
• you would end up spending
more than you

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 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

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 4. People respond to incentives.
Example

•When gas prices rise , consumers buy

more hybrid cars and fewer gas guzzling
SUVs.
•When cigarette taxes increase, teen
smoking fall.

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 5. Trade can make everyone better
off.

People gain from their ability to trade with one

another.
Competition results in gains from trading.
Trade allows people to specialize in what they
do best.

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 6. Markets are usually a good way to
organize economic activity.

In a market economy, households decide

what to buy and who to work for.
Firms decide who to hire and what to
produce.

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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
markets act as if guided by an
“invisible hand.”

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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 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.

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 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.

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7. Governments can sometimes improve
market outcomes. 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.

SE-361 Software Engineering Economics

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 8. The standard of living depends on a
country’s production.
• “A Country’s Standard of
Living Depends on its
Ability to Produce Goods
and Services”
• 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 rows, so does
its average income.
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 8. The standard of living depends on a country’s
production. 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

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 9. Prices rise when the government prints
too much money. Example

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.

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

 The Phillips Curve illustrates the tradeoff

between inflation and unemployment:

 Inflation  Unemployment
 It’s a short-run tradeoff!

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THANKS

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