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ECONOMICS

CHAPTER
Tran Thi Thanh Huyen (Dr.)
Faculty of Economics 1 Overview of economics
Banking Academy of Vietnam
Mobile: 098 383 0104
Email: huyenttt0104@gmail.com
Interactive PowerPoint Slides by: Interactive PowerPoint Slides by:
V. Andreea Chiritescu V. Andreea Chiritescu
Eastern Illinois University Eastern Illinois University

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Reading materials Purpose

Chapter 1, 2. Mankiw, N.G (2021), Principles of
Economics, 9th Edition, Cengage Learning.
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Lay out ten economic principles that will serve as building
blocks for the rest of the text. The ten principles can be
grouped into three categories: how people make decisions,
how people interact, and how the economy works as a
whole.
Familiarize students with how economists approach
economic problems.
Students will see how economists employ the scientific
method, the role of assumptions in model building, and the
application of two specific economic models.
 Students will also learn the important distinction between
two roles economists can play: as scientists when we try to
explain the economic world and as policymakers when we try
to improve it.

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Learning objectives Contents

By the end of this chapter, students should
understand:
1. What is economics?
• Ten principles of economics, about how each individual
makes decision, how individuals interact with each other
and how an economy works.
• The role of an economist, as a scientist and as a policy 2. Ten principles of economics
adviser.
• Some basic concepts: Circular-Flow Diagram,
Production Possibilities Frontier and Opportunity Cost.
• The difference between microeconomics and 3. Thinking like an economist
macroeconomics? Between positive and normative?

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Resources are scarce

• Scarcity: the limited nature of society’s
resources
– Society has limited resources and cannot
produce all the goods and services people wish
to have.
• Economics

1.1 What is economics? – The study of how society manages its

scarce resources

Interactive PowerPoint Slides by:

V. Andreea Chiritescu
Eastern Illinois University
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Economists study:
– How people decide how much they work,
what they buy, how much they save, and
how they invest their savings
– How firms decide how much to produce
and how many workers to hire
– How society decides how to divide its
Ten Principles of
resources between national defense,
consumer goods, protecting the 1.2 Economics
environment, and other needs
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University
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a. How People Make Decisions Principle 1: People Face Trade-Offs

Principle 1: People face trade-offs
Principle 2: The cost of something is what
you give up to get it
Principle 3: Rational people think at the
margin
Principle 4: People respond to incentives
To get something that we like, we have to give
up something else that we also like.
– Going to a party the night before an exam
• Less time for studying
– In order to have more money to buy stuff
• Working longer hours, less time for leisure

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EXAMPLE 1A: Society faces trade-offs EXAMPLE 1B: Society faces trade-offs
• The more a society spends on weapons to • Efficiency: Society gets the maximum
protect from foreign aggressors benefits from its scarce resources.
– The less it can spend on consumer goods • Equality: Prosperity is distributed uniformly
• Pollution regulations: cleaner environment and among society’s members.
improved health
– But at the cost of reducing the well-being of
the firms’ owners, workers, and customers
• More resources on the fight against the Covid-
19 Pandemic
– Less resources for economic growth
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EXAMPLE 1B: Society faces trade-offs Equality vs. Equity

• Trade-off:
– To achieve greater equality, we could Equality means each
redistribute income from wealthy to poor. individual or group of
people is given the
– But this reduces incentive to work and same resources or
produce, which shrinks the size of opportunities.
economic “pie”.
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Equity allocates the
exact resources and
opportunities needed for
each person with
different circumstances
to help him/her reach an
equal outcome. 16

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Principle 2: The Cost of Something EXAMPLE 2: Opportunity cost

Is What You Give Up to Get It
• Making decisions: • What is the opportunity cost of going to
college for a year?
– Compare costs with benefits of alternatives
• Tuition, books, and fees
– Need to include opportunity costs
• NOT: room and boarding/campus, food
• Opportunity cost • PLUS foregone earnings
– Whatever you have to give up to obtain • What is the opportunity cost of going to the
some item movies?
• The price of the movie ticket
• PLUS the value of the time you spend in the
theater
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EXAMPLE 2: Opportunity cost HOMEWORK

• What is the opportunity cost of being invited

1. “There’s no such thing as a free lunch”
to go to the movies? Do you agree or disagree with this
• The price of the movie ticket is zero statement? Give examples and arguments to
• OC = the value of the time you spend in the support your idea.
theater
2. Do you know why citizens in a large city are
always in a hurry and impatient, meanwhile
people in country sides seem to be more
friendly and easier to talk to?

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Principle 3: Rational People Think at the Margin
• Rational people
– Do the best they can to achieve their objectives
given the available opportunities
– Make decisions by evaluating costs and benefits
of marginal changes
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Principle 4: People Respond to Incentives
• Incentive
– Something that induces a person to act
• People respond to incentives
– Because the incentives change the costs and/or
benefits of their actions
– And rational people make decisions by
comparing the marginal costs and the marginal
benefits
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Active Learning 1: Thinking at the margin
A. As the manager at the local supermarket, you are
thinking of hiring one more cashier that would
increase sales revenues by $400 per week. You
have to pay the new cashier $300 per week.
Should you hire the new cashier? Why?
B. The average cost of each seat of a flight from New
York to Washington DC is $500.
A plane is about to take off with 10 empty seats
and a standby passenger waiting at the gate is
willing to pay $300 for a seat. Should the airline sell
the ticket?
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EXAMPLE 3: Incentives
• An increase in the price of pizzas:
– Consumers buy fewer pizzas.
– Sellers produce more pizzas.
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EXAMPLE 3: Incentives Active Learning 2: Applying the principles

The government increases the gasoline tax by $1 You are selling your old car. At the last minute, the car
per gallon. engine dies. You can pay $1,400 to have it repaired, or
• How do consumers respond? sell the car “as is.”
- Carpool In each of the following scenarios, should you have the
- Use public transportation car engine repaired? Explain.
- Drive smaller or more fuel-efficient cars A. What you could get for the car is $14,500 if the engine
- Move closer to work works, $11,200 if it doesn’t.
• How do businesses respond? B. What you could get for the ca is $12,300 if the engine
- Car manufacturers will produce more fuel-efficient works, $11,000 if it doesn’t.
cars.
- Due to higher cost per mile, trucking companies will HINT: In each scenario, we need to compare the marginal
hike prices benefits with the marginal costs of fixing the engine.

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b. How People Interact Principle 5: Trade Can Make Everyone Better Off

Principle 5: Trade can make everyone better off.

Principle 6: Markets are usually a good way to
organize economic activity.
Principle 7: Governments can sometimes improve
market outcomes.

What would our lives be like if we had to make our own

clothing or our own food?

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Principle 5: Trade Can Make Everyone Better Off
• People benefit from trade:
– People can buy a greater variety of goods and
services at lower cost.
• Countries benefit from trade:
– Allows countries to specialize in what they do
best
– Enjoy a greater variety of goods and services
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Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity – 3
• Prices:
– Determined by the interaction of buyers and
sellers
– Reflect the good’s value to buyers
– Reflect the cost of producing the good
• Adam Smith’s “invisible hand”:
– In the process prices guide households and
firms to make decisions to maximize their
benefit, it also helps to maximize society’s
economic well-being.
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Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity – 1
• Market
– A group of buyers and sellers
• “Organize economic activity” means
determining
– What goods and services to produce
– How to produce these goods and services
– How to allocate them to their final user
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Principle 7: Governments Can Sometimes
Improve Market Outcomes – 1
• Government: enforce property rights
– Enforce rules and maintain institutions that
are key to a market economy
• People are less inclined to work, produce,
invest, or purchase if there is a large risk of
their property being stolen.
• We rely on government-provided police and
courts to enforce our rights over the things we
produce.
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Principle 7: Governments Can Sometimes
Improve Market Outcomes – 2
• Government: enhance economic efficiency
–In the presence of externalities
E.g.: When the production of a good pollutes the
air and creates health problems for those who live
near the factories, the market on its own may fail to
take this cost into account.
– In the presence of market power
E.g.: The owner of the only gas station in a village
(far away from other villages) will have an incentive
to restrict the output to keep the price high.
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Principle 7: Governments Can Sometimes
Improve Market Outcomes – 3
• Important here:
– To say that the government can improve market
outcomes does not mean that it always will
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Principle 7: Governments Can Sometimes
Improve Market Outcomes – 3
• Government: promote equality
– Many public policies, such as the income tax
and the welfare system, aim to achieve a more
equal distribution of economic well-being.
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Active Learning 3: The government
In each of the following situations, what is the
government’s role? Does the government’s
intervention improve the outcome?
A. Public schools for school-aged children
B. Workplace safety regulations
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c. How the economy as a whole works ACTIVE LEARNING 4

Principle 8: A country’s standard of living depends
on its ability to produce goods and services.
Principle 9: Prices rise when the government prints
too much money.
Principle 10: Society faces a short-run trade-off
between inflation and unemployment.
Banking Academy decides to reduce the price of a
parking permit on campus from VND250.000 per semester
to VND100.000 per semester.
A. The number of students desiring to park their
motorbikes on campus will _________.
B. The amount of time it would take to find a parking place
will ___________.
C. Will the lower price of a parking permit necessarily
lower the true cost of parking? (Hint: opportunity cost)
D. Would the opportunity cost of parking be the same for
students with no outside employment and students with
jobs earning VND100.000 per hour?

37 © 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 38

1.2. Thinking like an economist

• Economists play two roles:
1. Scientists: try to explain the world
2. Policy advisors: try to improve the
world

Thinking like an
1.2 economist
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University

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a. The Economist as a Scientist a. The Economist as a Scientist

• As scientists, economists employ the • Economists make assumptions.
scientific method. – Simplify the complex world and make it easier
– Observation, Theory, and More to understand.
• For example, to study the relationship between price
Observation. and quantity of rice that consumers buy, we assume
– However, for economists, conducting that other factors, including income, unchanged.
experiments is often impractical. They • Economists use models to study economic
often have to make do with whatever data issues.
the world gives them – Simplified representation of a more complicated
reality
– Two main models: The circular-flow diagram;
production possibilities frontier.

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The Circular-Flow Diagram The circular flow – 1

• Circular-flow diagram Households:
– Visual model of the economy  Own the factors of production,
– Shows how money flow through markets sell/rent them to firms for income
among households and firms  Buy and consume goods and
• Two decision makers services
Households
– Firms and households Firms
• Interacting in two markets Firms:
– Market for goods and services  Buy/hire factors of production,
use them to produce goods
– Market for factors of production (inputs)
and services
 Sell goods and services
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The circular flow – 2 The circular flow – 3

Revenue Spending
Markets for Markets for
Goods and G&S Goods &
G&S
Services sold Services bought
 Goods and services
are bought and sold.
 Sellers: firms
Firms Households
 Inputs are bought  Buyers: households
and sold.
 Sellers: households Factors of Labor, land,
 Buyers: firms Markets for production Markets for capital
Factors of Factors of
Production Wages, rent, Production Income
profit
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The PPF EXAMPLE 4: The PPF

• Production possibilities frontier (PPF) • Assume the following:
– A graph that shows various combinations of – A country produces only two goods: Cars and
outputs that the economy can possibly rice.
produce, given the available factors of – It has a fixed amount of resources (labor).
production and the available production
– And it has a fixed amount and quality of
technology.
technology.
• Maximum outputs that an economy can produce
• Given: the available inputs and the available – The available resources and technology can be
production technology used to produce:
• Only rice (5,000 tons)
• Only Cars (100 Cars)
• Or a combination of rice and Cars
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EXAMPLE 4: Drawing the PPF Active Learning 5: Points off the PPF
Cars
100 F Use the graph from the previous example.
Cars Tons of E
rice 80 • Would it be possible for the economy to produce
A 0 5,000 60
D the following combinations of the two goods?
B 20 4,000 C – Point H: 80 Cars and 4,000 tons of rice
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C 40 3,000 B – Point G: 20 Cars and 2,000 tons of rice
20
D 60 2,000 A
E 80 1,000 0 1,000 2,000 3,000 4,000 5,000
F 100 0 Rice (tons)

• Efficient: the economy is getting all it can from the scarce

resources available – points on the PPF (A, B, C, D, E, F)
• Inefficient levels of production: points inside the PPF
• Not feasible: points outside the PPF 49 50

The PPF: What We Know So Far Economic growth and the PPF
• Points on the PPF (like A – F): efficient Cars • With additional resources
– Efficient: all resources are fully utilized or an improvement in
120 Economic growth technology, the economy
• Points under the PPF (like G): possible shifts the PPF
100 can produce:
– Not efficient: some resources are outward.
• more rice,
underutilized (e.g., workers unemployed, 80
• More cars,
factories idle) 50
• or any combination in
• Points above the PPF (like H) 40
between.
– Not possible 20

0 1,000 2,000 3,000 4,000 5,000 6,000

rice (tons)

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Moving Along the PPF EXAMPLE 5: The PPF and opportunity cost
Cars
• Moving along a PPF To produce the first
100 F
– Involves shifting resources from the E
1,000 tons of rice: give
production of one good to the other 80 up 20 Cars
D
• Society faces a tradeoff 60 • Opportunity cost of 1
C
40 ton of rice = _______
– Getting more of one good requires sacrificing B
some of the other. 20
A To produce the first 20
• The slope of the PPF 0 1,000 2,000 3,000 4,000 5,000
cars: give up 1,000
– The opportunity cost of one good in terms of Rice (tons) tons of rice
the other is the slope of the PPF • Opportunity cost of 1
car = _______

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The Shape of the PPF Why the PPF might be bowed outward – 1
• Shape of the PPF • As the economy shifts

Beer
– Straight line: constant opportunity cost resources from beer to
• Previous example: the opportunity cost of 1 car is computers:
50 tons of rice
• The opportunity cost of
– Bowed outward: increasing opportunity cost computers increases.
• As more units of a good are produced, we need to • PPF becomes steeper
give up increasing amounts of the other good
produced.

Computers

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Why the PPF might be bowed outward – 2 Micro - and Macroeconomics

At A, opportunity cost of • At point A, most workers
Beer
computers is low. are producing beer, even
A those who are better
suited to producing
computers.

• At B, most workers are

At B, opportunity producing computers.
cost of computers
B The few left in beer
is high. production are the best
brewers.
Computers

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Micro - and Macroeconomics Micro - and Macroeconomics

• Microeconomics
– The study of how households 1. High tax on cigarette will limit smoking.
and firms make decisions and
how they interact in markets 2. Unemployment in European countries increased
– The study of government
interventions in each market rapidly in the 1990s.
• Macroeconomics 3. An increase in households’ income can lead to an
– The study of economy-wide
increase in the demand for cars.
phenomena, including inflation,
unemployment, and economic 4. High interest rates can reduce GDP of a country
growth
– Studying the economic role of due to low private investment.
government at macro level.
5. Workers with higher wages can buy more food.
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b. The Economist as Policy Adviser
• Positive statements: descriptive
– Attempt to describe the world as it is
– Confirm or refute by examining evidence
• “Minimum-wage laws cause unemployment.”
• Normative statements: prescriptive
– Attempt to prescribe how the world should be
• “The government should raise the minimum wage.”
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ASK THE EXPERTS
“Due to Covid-19 pandemic, people are isolated from
social activities. Working and studying from home is
getting more popular. In this time, people need more
computers/ laptops for online studying/working than
ever before. As a result, the price of computers/laptops
has risen dramatically. According to some experts, to
stabilize the laptop market, the government should
impose a price ceiling to protect consumers.”
Questions:
1. Which statement is positive?
2. Which statement is normative?
3. Why has the price of computers/laptops increased? 63
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Active Learning 6: Positive or normative?
Which of these statements are “positive” and which
are “normative”? How can you tell the difference?
A. The government should raise the minimum wage to
help workers to improve their lives
B. Taxes imposed on a commodity will decrease its
supply
C. When income rises, demand for instant noodles falls.
D. The government should print more money.
E. A tax cut is needed to stimulate the economy.
F. An increase in the price of coffee will cause an
increase in consumer demand for tea.
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PREPARATION FOR CHAPTER 2
A. Related to demand part, your mission is to
prepare a presentation to clarify:
(i) quantity demanded, law of demand;
(ii) two ways to illustrate demand (demand
schedule and demand curve);
(iii) how to determine market demand from
individual demand;
(iv) Difference between movement along the
demand curve and demand curve shifts.
(v) and the most important part of this section:
which factors change demand then shift the
demand curve.
B. The same task is applied to supply part. 64
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SUMMARY
• Individual decision making:
• People face trade-offs among alternative goals.
• The cost of any action is measured in terms of
forgone opportunities.
• Rational people make decisions by comparing
marginal costs and marginal benefits.
• People change their behavior in response to the
incentives they face.
SUMMARY
• Interactions among people:
• Trade and interdependence can be mutually
beneficial.
• Markets are usually a good way of coordinating
economic activity among people.
• Governments can potentially improve market
outcomes by remedying a market failure or by
promoting greater economic equality.

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SUMMARY SUMMARY
• The economy as a whole: • Economists are scientists.
• Productivity is the ultimate source of living – Make appropriate assumptions and build
standards. simplified models
• Growth in the quantity of money is the ultimate – Use the circular-flow diagram and the
source of inflation. production possibilities frontier
• Society faces a short-run trade-off between • Microeconomists study decision making by
inflation and unemployment. households and firms and their interactions in the
marketplace.
• Macroeconomists study the forces and trends that
affect the economy as a whole.

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SUMMARY
• A positive statement is an assertion about how the
world is.
• A normative statement is an assertion about how
the world ought to be.
• As policy advisers, economists make normative
statements.
• Economists sometimes offer conflicting advice.
– Differences in scientific judgments
– Differences in values

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