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INTRODUCTION
Ten Principles of
Economics
Economy. . .
. . . The word economy comes from a
Greek word for one who manages a
household.
Ten principles of economics

A household and an economy


face many decisions:

Who will work?

Wha goods and how many of hem should !e


produced?

Wha resources should !e used in producion?

A wha price should he goods !e sold?


Ten principles of economics
"ociey and "carce #esources:

The managemen of sociey$s resources is


imporan !ecause resources are scarce.

Scarcity. . . means ha sociey has limied


resources and herefore canno produce all he
goods and ser%ices people wish o ha%e.
Ten principles of economics
Economics is he sudy of how sociey
manages is scarce resources.
Ten principles of economics

&ow people make decisions.

'eople face radeoffs.

The cos of somehing is wha you gi%e up o


ge i.

#aional people hink a he margin.

'eople respond o inceni%es.


Ten principles of economics

&ow people inerac wih each oher.

Trade can make e%eryone !eer off.

(arkes are usually a good way o organi)e


economic aci%iy.

Go%ernmens can someimes impro%e


economic oucomes.
Ten principles of economics

The forces and rends ha affec how he


economy as a whole works.

The sandard of li%ing depends on a counry$s


producion.

'rices rise when he go%ernmen prins oo


much money.

"ociey faces a shor*run radeoff !eween


inflaion and unemploymen.
'rinciple +,: 'eople -ace Tradeoffs.
There is no such hing as a free lunch.
(aking decisions re/uires rading
off one goal agains anoher.
'rinciple +,: 'eople -ace Tradeoffs.
To ge one hing0 we usually ha%e o gi%e up
anoher hing.

Guns %. !uer

-ood %. clohing

1eisure ime %. work

Efficiency %. e/uiy
'rinciple +,: 'eople face radeoffs

Efficiency %. E/uiy

Efficiency means sociey ges he mos ha i


can from is scarce resources.

Equity means he !enefis of hose resources


are disri!ued fairly among he mem!ers of
sociey.
'rinciple +2: he cos of somehing is
wha you gi%e up o ge i.

3ecisions re/uire comparing coss and


!enefis of alernai%es.

Wheher o go o college or o work?

Wheher o sudy or go ou on a dae?

Wheher o go o class or sleep in?

The opportunity cost of an iem is wha you


gi%e up o o!ain ha iem.
'rinciple +2: he cos of somehing is
wha you gi%e up o ge i.
1A 1aker !aske!all
sar 4o!e 5ryan
chose o skip college
and go sraigh from
high school o he
pros where he has
earned millions of
dollars.
'eople make decisions !y comparing
coss and !enefis a he margin.
'rinciple +6: #aional people hink a he
margin.

Marginal changes are small0 incremenal


ad7usmens o an e8ising plan of acion.
'rinciple +9: 'eople #espond o
:nceni%es.

(arginal changes in coss or !enefis


moi%ae people o respond.

The decision o choose one alernai%e


o%er anoher occurs when ha alernai%e$s
marginal !enefis e8ceed is marginal
coss.
'rinciple +;: Trade <an (ake E%eryone
5eer =ff.

'eople gain from heir a!iliy o rade wih


one anoher.

<ompeiion resuls in gains from rading.

Trade allows people o speciali)e in wha


hey do !es.
'rinciple +>: (arkes are usually a good
way o organi)e economic aci%iy.

A market economy is an economy ha


allocaes resources hrough he
decenrali)ed decisions of many firms and
households as hey inerac in markes for
goods and ser%ices.

&ouseholds decide wha o !uy and who o


work for.

-irms decide who o hire and wha o produce.


'rinciple +>: (arkes are usually a good
way o organi)e economic aci%iy.

Adam "mih made he o!ser%aion ha


households and firms ineracing in markes
ac as if guided !y an in%isi!le hand.

5ecause households and firms look a prices


when deciding wha o !uy and sell0 hey
unknowingly ake ino accoun he social coss
of heir acions.

As a resul0 prices guide decision makers o


reach oucomes ha end o ma8imi)e he
welfare of sociey as a whole.
'rinciple +?: Go%ernmens <an
"omeimes :mpro%e (arke =ucomes.

Market failure occurs when he marke fails


o allocae resources efficienly.

When he marke fails @!reaks downA


go%ernmen can iner%ene o promoe
efficiency and e/uiy.
'rinciple +?: Go%ernmens <an
"omeimes :mpro%e (arke =ucomes.

(arke failure may !e caused !y

an externality0 which is he impac of one


person or firm$s acions on he well*!eing of a
!ysander.

market power0 which is he a!iliy of a single


person or firm o unduly influence marke
prices.
'rinciple +B: The "andard of 1i%ing
3epends on a <ounry$s 'roducion.

"andard of li%ing may !e measured in


differen ways:

5y comparing personal incomes.

5y comparing he oal marke %alue of a


naion$s producion.
'rinciple +B: The "andard of 1i%ing
3epends on a <ounry$s 'roducion.

Almos all %ariaions in li%ing sandards are


e8plained !y differences in counries$
produci%iies.

Productivity is he amoun of goods and


ser%ices produced from each hour of a
worker$s ime.
'rinciple +B: The "andard of 1i%ing
3epends on a <ounry$s 'roducion.

"andard of li%ing may !e measured in


differen ways:

5y comparing personal incomes.

5y comparing he oal marke %alue of a


naion$s producion.
'rinciple +C: 'rices #ise When he
Go%ernmen 'rins Too (uch (oney.

:nflaion is an increase in he o%erall le%el


of prices in he economy.

=ne cause of inflaion is he growh in he


/uaniy of money.

When he go%ernmen creaes large


/uaniies of money0 he %alue of he money
falls.
'rinciple +,D: "ociey -aces a "hor*run
Tradeoff 5eween :nflaion and
Enemploymen.

The 'hillips <ur%e illusraes he radeoff


!eween inflaion and unemploymen:
:nflaion Enemploymen
:$s a shor*run radeoff.
"ummary

When indi%iduals make decisions0 hey


face radeoffs among alernai%e goals.

The cos of any acion is measured in


erms of foregone opporuniies.

#aional people make decisions !y


comparing marginal coss and marginal
!enefis.

'eople change heir !eha%ior in response


o he inceni%es hey face.
"ummary

Trade can !e muually !eneficial.

(arkes are usually a good way of


coordinaing rade among people.

Go%ernmen can poenially impro%e


marke oucomes if here is some marke
failure or if he marke oucome is
ine/uia!le.
"ummary

'roduci%iy is he ulimae source of li%ing


sandards.

(oney growh is he ulimae source of


inflaion.

"ociey faces a shor*run radeoff !eween


inflaion and unemploymen.