quiz

bellar23

Chapter1.pdf

Home >Business & Finance homework help >Economics homework help >quiz

PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University

N. GREGORY MANKIW

PRINCIPLES OF

ECONOMICS Eight Edition

Ten Principles of Economics

CHAPTER

© 2018 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.

Ten Principles of Economics

•  Economy, “oikonomos” (Greek) – “One who manages a household” – Households and economies have much in

common •  A household faces many decisions

– Allocate scarce resources •  Taking into account: ability, effort, desire

•  Society faces many decisions – Allocate resources and output

2 © 2018 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.

Ten Principles of Economics

•  Resources are scarce •  Scarcity: the limited nature of society’s

resources – Society has limited resources and

therefore cannot produce all the goods and services people wish to have

•  Economics – The study of how society manages its

scarce resources

3 © 2018 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.

Ten Principles of Economics

•  Economists study: – How people make decisions

•  Work, buy, save, invest – How people interact with one another – The forces and trends that affect the

economy as a whole •  Growth in average income •  Fraction of the population that cannot find work •  Rate at which prices are rising

4 © 2018 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.

Ten Principles of Economics

•  How people make decisions 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

5 © 2018 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.

Ten Principles of Economics

•  How people interact 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

6 © 2018 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.

Ten Principles of Economics

•  How the economy as a whole works 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

7 © 2018 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.

How People Make Decisions, #1

Principle 1: People Face Trade-offs •  “There ain’t no such thing as a free lunch”

– To get something that we like, we usually have to give up something else that we also like

•  Making decisions – Requires trading off one goal against

another: to study one more hour, give up one hour of TV

8 © 2018 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.

How People Make Decisions, #1

•  Trade-offs – Students: how to allocate time – Parents: how to spend income

•  Society faces trade-offs: – National defense and consumer goods

(guns and butter) – Clean environment and high level of

income – Efficiency and equality

9 © 2018 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.

How People Make Decisions, #1

•  Efficiency – Society is getting the maximum benefits

from its scarce resources – The size of the economic pie

•  Equality – Distributing economic prosperity uniformly

among the members of society – How the pie is divided into individual slices

10 © 2018 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.

How People Make Decisions, #1

•  Efficiency and Equality trade-off – Public policies aimed at equalizing the

distribution of economic well-being •  Welfare system, Unemployment insurance •  Individual income tax •  Achieve greater equality but reduce efficiency

•  Recognizing that people face trade-offs – Does not by itself tell us what decisions

they will or should make

11 © 2018 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.

How People Make Decisions, #2

Principle 2: The Cost of Something Is What You Give Up to Get It •  People face trade-offs; making decisions:

– Compare costs with benefits of alternatives

– Need to include opportunity costs •  Opportunity cost

– Whatever must be given up to obtain some item

12 © 2018 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.

How People Make Decisions, #3

Principle 3: Rational People Think at the Margin •  Rational people

– Systematically and purposefully do the best they can to achieve their objectives

– Given the available opportunities •  Marginal changes

– Small incremental adjustments to a plan of action

13 © 2018 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.

How People Make Decisions, #3

•  Rational decision maker – Make decisions by

comparing marginal benefits and marginal costs

– Take action only if: Marginal benefits > Marginal costs

14 © 2018 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.

“Is the marginal bene0it of this call greater than the marginal cost?”

How People Make Decisions, #3

•  Why is water so cheap, while diamonds are so expensive? – Water – needed to survive – Diamonds – not a necessity – A person’s willingness to pay for a good

•  Based on the marginal benefit that an extra unit of the good would yield

•  The marginal benefit depends on how many units a person already has

15 © 2018 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.

How People Make Decisions, #4

Principle 4: People Respond to Incentives •  Incentive

– Something that induces a person to act – Higher price

•  Buyers consume less; Sellers produce more – Public policy

•  Change costs or benefits •  Change people’s behavior •  Can have unintended consequences

16 © 2018 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.

How People Make Decisions, #4

•  Seat belt law alters a driver’s cost–benefit calculation (Sam Peltzman, 1975) – Seat belts make accidents less costly

(reduce the likelihood of injury or death) •  Reduce the benefits of slow, careful driving

– People drive faster and less carefully: •  Larger number of accidents

– Net result: little change in the number of driver deaths and an increase in the number of pedestrian deaths

17 © 2018 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.

How People Interact, #5

Principle 5: Trade Can Make Everyone Better Off •  Trade

– Allows each person to specialize in the activities he or she does best

– Enjoy a greater variety of goods and services

18 © 2018 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.

“For $5 a week you can watch baseball without being nagged to cut the grass!”

How People Interact, #6

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity •  Communist countries, central planning

– Government officials (central planners) are in the best position to allocate the economy’s scarce resources •  What goods and services were produced •  How much was produced •  Who produced and consumed these goods

and services 19

How People Interact, #6

•  Market economy, allocation of resources – Through decentralized decisions of many

firms and households – As they interact in markets for goods and

services – Guided by prices and self-interest

20 © 2018 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.

How People Interact, #6

•  Market economies – No one is looking out for the economic

well-being of society as a whole – Have proven remarkably successful in

organizing economic activity to promote overall economic well-being

21 © 2018 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.

How People Interact, #6

•  Adam Smith’s “invisible hand” – Households and firms interacting in

markets •  Act as if they are guided by an “invisible

hand” •  Leads them to desirable market outcomes

– Corollary: Government intervention •  Prevents the invisible hand’s ability to

coordinate the decisions of the households and firms that make up the economy

22 © 2018 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.

Adam Smith Would Have Loved Uber

•  Strict controls in the market for taxis – Regulation of insurance and safety – Limit entry into the market: limited

number of taxi medallions or permits – May determine the prices that taxis are

allowed to charge – To keep unauthorized drivers off the

streets and to prevent all drivers from charging unauthorized prices

23 © 2018 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.

Adam Smith Would Have Loved Uber

•  Uber, launched in 2009 – App for smartphones that connects

passengers and drivers – Uber cars do not roam the streets looking

for taxi-hailing pedestrians •  Not taxis; not subject to the same regulations •  But they offer much the same service

– Often charge less than taxis – Drivers raise their prices significantly

when there is a surge in demand 24

Adam Smith Would Have Loved Uber

•  Not everyone is fond of Uber – Traditional taxi drivers

•  Economists love Uber – Increase consumer well-being

•  Surge pricing – Increases the quantity of car services

supplied when they are most needed – Allocate the services to those consumers

who value them most highly

25 © 2018 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.

How People Interact, #7

Principle 7: Governments Can Sometimes Improve Market Outcomes •  We need government

– Enforce rules and maintain institutions that are key to a market economy

– Need institutions to enforce property rights – Promote efficiency, avoid market failure – Promote equality, avoid disparities in

economic wellbeing 26

How People Interact, #7

•  Property rights – Ability of an individual to own and exercise

control over scarce resources •  Market failure

– Situation in which the market left on its own fails to allocate resources efficiently

– Externalities – Market power

27 © 2018 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.

How People Interact, #7

•  Externality – Impact of one person’s actions on the

well-being of a bystander – Pollution

•  Market power – Ability of a single economic actor (or small

group of actors) to have a substantial influence on market prices

28 © 2018 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.

How People Interact, #7

•  Disparities in economic wellbeing – Market economy rewards people

•  According to their ability to produce things that other people are willing to pay for

– Government intervention, public policies •  Aim to achieve a more equal distribution of

economic well-being •  May diminish inequality •  Process far from perfect

29 © 2018 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.

How Economy as a Whole Works, #8

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services •  Large differences in living standards

– Among countries: •  Average annual income, 2014: $55,000

(U.S.); $17,000 (Mexico); $13,000 (China); $6,000 (Nigeria)

– Over time: In the U.S. incomes have historically grown about 2% per year

30 © 2018 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.

How Economy as a Whole Works, #8

•  Explanation: differences in productivity •  Productivity

– Quantity of goods and services produced from each unit of labor input

– Higher productivity •  Higher standard of living

– Growth rate of nation’s productivity •  Determines growth rate of its average income

31 © 2018 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.

How Economy as a Whole Works, #9

Principle 9: Prices Rise When the Government Prints Too Much Money •  Inflation

– An increase in the overall level of prices in the economy

•  Causes for large or persistent inflation – Growth in quantity of money – Value of money falls

32 © 2018 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.

“Well it may have been 68 cents when you got in line, but it’s 74 cents now!”

How Economy as a Whole Works, #10

Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment •  Short-run effects of monetary injections:

– Stimulates the overall level of spending and the demand for goods and services

– Firms raise prices, hire more workers, produce more goods and services

– Lower unemployment 33

How Economy as a Whole Works, #10

•  Short-run trade-off between unemployment and inflation – Over a period of a year or two, many

economic policies push inflation and unemployment in opposite directions

– Key role – analysis of business cycle •  Business cycle

– Fluctuations in economic activity – Such as employment and production

34 © 2018 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.

Table 1 Ten Principles of Economics

35 © 2018 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.