TEN PRINCIPLES

OF ECONOMICS

Chapter 1

Copyright © 2017 by Nelson Education Ltd. 1-1

 TEN PRINCIPLES OF ECONOMICS

The word, “economy” comes from the Greek word for:

“one who manages a household.”

What should be done?

Who should do it? Who gets the output?
TEN PRINCIPLES OF ECONOMICS

 The management of society’s resources (e.g., people,

land, buildings, machinery)
 important because resources are scarce
 Scarcity:
 limited nature of society’s resources

Copyright © 2017 by Nelson Education Ltd. 1-3

TEN PRINCIPLES OF ECONOMICS

Economics:
“study of how society manages its scarce resources”
 HOW PEOPLE MAKE DECISIONS

Principle #1: People Face Tradeoffs

“There is no such thing as a free lunch.”

 Efficiency: the property of society getting the most it

can from its scarce resources
 Equity: the property of distributing economic
prosperity fairly among the members of society

Copyright © 2017 by Nelson Education Ltd. 1-5

 HOW PEOPLE MAKE DECISIONS

Principle #2: The Cost of Something

Is What You Give Up to Get It
 Opportunity cost: whatever must be given up
to obtain some item.
 HOW PEOPLE MAKE DECISIONS

Principle #3: Rational People Think at the Margin

 Rational people: people who systematically and
purposefully do the best they can to achieve their
objectives
 Marginal changes: small incremental adjustments to a
plan of action

Copyright © 2017 by Nelson Education Ltd. 1-7

 HOW PEOPLE MAKE DECISIONS

Principle #4: People Respond to Incentives

 Incentive: something that induces
a person to act

Mark Zuckerberg understood incentives.

Copyright © 2017 by Nelson Education Ltd. 1-8

 HOW PEOPLE INTERACT

Principle #5: Trade Can Make Everyone Better Off

 Trade versus Self-sufficiency

Copyright © 2017 by Nelson Education Ltd. 1-9

 HOW PEOPLE INTERACT
Principle #6: Markets Are Usually
a Good Way to Organize
Economic Activity
 Market economy: allocates resources through
the decentralized decisions of many firms and

Goran Bogicevic/Shutterstock
households as they interact in markets for goods
and services
 HOW PEOPLE INTERACT
Principle #6: Markets Are Usually
a Good Way to Organize
Economic Activity (cont’d)
 In his 1776 book, Adam Smith observed that
households and firms interacting in markets act
as if they are guided by an “invisible hand”
that leads them to desirable market outcomes.

“buy pursuing his own interest he frequently promotes that of the society more effectually than when he really
intends to promote it.”
 HOW PEOPLE INTERACT

Principle #7: Governments Can Sometimes Improve

Market Outcomes
 We need governments for two reasons:
1. To enforce property rights
 Property rights: the ability of an individual to own and
exercise control over scarce resources

Copyright © 2017 by Nelson Education Ltd. 1-12

 HOW PEOPLE INTERACT

Principle #7: Governments Can Sometimes Improve

Market Outcomes (cont’d)
2. Because the invisible hand is powerful, but it is not
omnipotent
 There are two broad reasons for a government to
intervene in the economy:
1. The goal of efficiency
2. The goal of equity
Copyright © 2017 by Nelson Education Ltd. 1-13
 HOW PEOPLE INTERACT
 Goal of efficiency
 Market failure: when a market left on its own fails to allocate resources efficiently
1. Externality: impact of one person’s actions on the well-being of a bystander
2. Market Power: the ability of a single economic actor (or small group of actors)
to have a substantial influence on market prices
 Goal of equity
 Even when the invisible hand is yielding efficient outcomes
 it can leave sizable disparities in economic well-being.
HOW THE ECONOMY AS A WHOLE WORKS

Principle #8: A Country’s Standard of Living Depends

on Its Ability to Produce
Goods and Services
 Productivity: the quantity of goods and services
produced
 from each hour of a worker’s time
Copyright © 2017 by Nelson Education Ltd. 1-16
Copyright © 2017 by Nelson Education Ltd. 1-17
Copyright © 2017 by Nelson Education Ltd. 1-18
HOW THE ECONOMY AS A WHOLE WORKS

Principle #9: Prices Rise When the

Government Prints
Too Much Money
 Inflation: an increase in the overall
level of prices in the economy
 What causes inflation?

Thinkstock
HOW THE ECONOMY AS A WHOLE WORKS

Principle #10: Society Faces a Short-Run

Tradeoff between Inflation and Unemployment
 Short-run tradeoff
 plays a key role in the analysis of business cycle
 Business cycle: irregular & largely unpredictable fluctuations
in economic activity
 as measured by production of goods & services
 or # of people employed
THINKING LIKE
AN ECONOMIST

Chapter 2

Copyright © 2017 by Nelson Education Ltd. 2-21

 Our First Model:
The Circular-Flow Diagram
 Circular-Flow Diagram:
 a visual model of the economy
 shows how dollars flow through markets
 among households & firms
 The
Circular
Flow
 Our Second Model:
The Production Possibilities Frontier

 Production Possibility Frontier:

 shows combinations of output the economy can possibly
produce given:
 available factors of production
 available production technology
 FIGURE 2.2:
The Production Possibilities Frontier
 FIGURE 2.3:
A Shift in the Production Possibilities Frontier
THE ECONOMIST AS POLICY ADVISER

 When economists are trying to explain the world

 They’re scientists
 When they are trying to help improve it
 they ‘re policy advisers
 Positive versus Normative Analysis

Positive statements:
 claims that describe the world as it is
Normative statements:
 claims that prescribe how the world should be
Active Learning
Discussion Questions

Which of these statements are “positive” and which are “normative”? How
can you tell the difference?
a. Prices rise when the government increases the quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of burritos will cause an increase in consumer
demand for video rentals.
Why Economists’ Advice Is Not Always Followed

 Any economist who advises government

 knows his or her recommendations are not always heeded
 In the real world
 figuring out the right policy is only part of the job for the government.
 WHY ECONOMISTS DISAGREE
There are 2 basic reasons:
1. Disagree about the validity of alternative
positive theories on how the world
works.
2. Have different values
 therefore, different normative views
 what should the policy accomplish?

Thinkstock
THE END

Chapter 2
THE MARKET
FORCES OF SUPPLY
AND DEMAND
Chapter 4

Copyright © 2017 by Nelson Education Ltd. 4-33

 DEMAND

 We begin our study of markets by examining the

behaviour of buyers.
The Demand Curve: The Relationship
Between Price and Quantity Demanded

 Quantity demanded: amount of a good

 buyers are willing and able to purchase
 Law of demand: the claim that, other things equal,
 the quantity demanded of a good falls when the price of
the good rises
Market Demand versus Individual Demand
 FIGURE 4.3:
Shifts in the Demand Curve
 Shifts in the Demand Curve
 Factors that shift the demand curve:
 Tastes
 Expectations
 Future prices, income or availability
 Number of buyers
 Income
 Price of related goods
 FIGURE 4.4:
Shifts in the Demand Curve versus Movements along the Demand Curve
 The Supply Curve: The Relationship
Between Price and Quantity Supplied

 Quantity supplied: amount of a good

 that sellers are willing and able to sell
 Law of supply: other things equal,
 the quantity supplied of a good rises when the price of
the good rises
FIGURE 4.6 (continued)
 Shifts in the Supply Curve

 Factors that shift the supply curve:

 Input prices
 Technology
 Expectations
 Number of sellers
 TABLE 4.2:
Variables That Influence Sellers
 FIGURE 4.8:
The Equilibrium of Supply and Demand
 FIGURE 4.9:
Markets Not in Equilibrium