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Chapter 1

Ten principles of economics


Warm up

Find someone…
Ten principles of economics
How People Make Decisions
1: People Face Trade-offs
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
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 Market Outcomes
How the Economy as a Whole Works
8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and
Services
9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
Which principles can you
find in your article?
5 mins to think then tell your group
(3-4) about your findings.
Questions for Review

Discuss in groups.
Questions for Review

1. Give three examples of


important trade-offs that you
face in your life.
2. What is the opportunity cost
of seeing a movie?
Questions for Review

3. Water is necessary for life. Is


the marginal benefit of a glass of
water large or small?
4. Why should policymakers
think about incentives?
Questions for Review

5. Why isn’t trade among


countries like a game with some
winners and some losers?
6. What does the “invisible
hand” of the marketplace do?
Ten principles of economics
How People Make Decisions
1: People Face Trade-offs
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
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 Market Outcomes
How the Economy as a Whole Works
8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and
Services
9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
True/False FALSE
1. When the government
redistributes income with taxes
and welfare, the economy
becomes more efficient.
True/False
TRUE
2. When economists say, “There
ain’t no such thing as a free
lunch”, they mean that all
economic decisions involve
trade-offs.
True/False FALSE
Adam Smith’s “invisible hand”
concept describes how corporate
business reaches into the
pockets of consumers like an
“invisible hand”.
True/False TRUE
Rational people act only when
the marginal benefit of the
action exceeds the marginal cost.
True/False FALSE
The United States will benefit
economically if they eliminate
trade with Asian countries
because they will be forced to
produce more of their own cars
and clothes.
True/False TRUE
When a jet flies overhead, the
noise it generates is an
externality.
True/False FALSE
A tax on liquor raises the price of
liquor and provides an incentive
for consumers to drink more.
True/False TRUE
An unintended consequence of
public support for higher education
is that low tuition provides an
incentive for many people to attend
state universities even if they have
no desire to learn anything.
True/False TRUE
Sue is better at cleaning, and Bob is
better at cooking. It will take fewer
hours to eat and clean if Bob
specializes in cooking and Sue
specializes in cleaning than if they
share the household duties evenly.
True/False TRUE
High and persistent inflation is
caused by excessive growth in
the quantity of money in the
economy.
True/False FALSE
In the short run, a reduction in
inflation tends to cause a
reduction in unemployment.
True/False FALSE
An auto manufacturer should
continue to produce additional
autos as long as the firm is
profitable, even if the cost of the
additional units exceeds the
price received.
True/False FALSE
An individual farmer is likely to
have market power in the market
for wheat.
True/False TRUE
To a student, the opportunity
cost of going to a basketball
game would include the price of
the ticket and the value of the
time that could have been spent
studying.
True/False FALSE
Workers in the US have a
relatively high standard of living
because the US has a relatively
high minimum wage.
Practice Problems

People respond to incentives.


Governments can alter incentives and
hence, behavior with public policy.
However, sometimes public policy
generates unintended consequences by
producing results that were not
anticipated.
Practice Problems

For the following public policy, determine


the intended result and unintended
consequence.
E.g. The government raises the minimum
wage to 4.180.000 vnd per month.
Practice Problems

•Some workers find jobs at the higher


wage making these workers better off.
•Some workers find no job at all because
few firms want to hire low-productivity
workers at this high wage.
Practice Problems

Find more examples


Practice Problems

The tax will increase the price of fuel by


about 30 cents per gallon and will
continue to rise over the next few years,
the French government says. Gas already
costs about $7.06 per gallon in France.
Practice Problems

Water is necessary for life. Diamonds are


not. Is the marginal benefit of an
additional glass of water greater or lesser
than an additional one-carat diamond?
Why?
Practice Problems

Your car needs to be repaired. You have


already paid $500 to have transmission
fixed, but it still doesn’t work properly. You
can sell your car “as is” for $2000. If your
car were fixed, you could sell it for $2500.
Your car can be fixed with a guarantee for
another $300. Should you repair your car?
Why?
Practice Problems

If the government printed twice as much


money, what do you think would happen to
prices and output if the economy were
already producing at maximum capacity?
Practice Problems

A goal for a society is to distribute


resources more equally and fairly. How
might you distribute resources if everyone
were equally talented and worked equally
hard? What if people had different talents
and some people worked hard, while
others did not?
Practice Problems

Who is more self-interested, the buyer or


the seller?
Homework

Problems and applications


chapter 2