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Chapter 1 10 Principles

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11 views

Chapter 1 10 Principles

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pth.tranggg01
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 1

Ten principles of Economics


Look for the answers to these questions:

 What kinds of questions does economics address?


 What are the principles of how people make
decisions?
 What are the principles of how people interact?
 What are the principles of how the economy as a
whole works?
Ten Principles of Economics

 Resources are scarce


 Scarcity: the limited nature of society’s resources
 Society has limited resources
 Cannot produce all the goods and services people wish
to have
 Economics
 The study of how society manages its scarce resources
Ten Principles of Economics

 Economists study:
 How people decide what to buy,
how much to work, save, and spend
 How firms decide how much to produce,
how many workers to hire
 How society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
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
Principle 1: People Face Trade-offs

 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
 Having more money to buy stuff
 Working longer hours, less time for leisure
 Protecting the environment
 Resources could be used to produce
consumer goods
Principle 1: People Face Trade-offs

 Society faces trade-offs:


 The more it spends on national defense (guns) to
protect its shores

 The less it can spend on consumer goods (butter) to


raise the standard of living at home

 Pollution regulations: cleaner environment and


improved health
 But at the cost of reducing the incomes of the firms’ owners,
workers, and customers
Principle 1: People Face Trade-offs

 Society faces trade-offs:


 The more it spends on national defense (guns) to
protect its shores
 The less it can spend on consumer goods (butter) to
raise the standard of living at home

 Pollution regulations: cleaner environment and


improved health
 But at the cost of reducing the incomes of the firms’
owners, workers, and customers
Principle 1: People Face Trade-offs

 Efficiency: society gets the most from its scarce


resources
 Equality: prosperity is distributed uniformly
among society’s members
 Tradeoff:
 To achieve greater equality, could redistribute
income from wealthy to poor
 But this reduces incentive to work and produce,
shrinks the size of economic “pie”
Principle 2: The Cost of Something Is What
You Give Up to Get It

 Making decisions:
 Compare costs with benefits of alternatives
 Need to include opportunity costs

 Opportunity cost
 Whatever must be given up to obtain some item
 Going to college for a year
 Going to the movie
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
 Make decisions by evaluating costs and benefits
of marginal changes
 Small incremental adjustments to a plan of
action
Principle 4: People Respond to Incentives

 Incentive
 Something that induces a person to act

 Examples:
 Price rises => buy less
 When cigarette taxes increase,
teen smoking falls
Active Learning 1 Applying the principles

You are selling your 2007 Mustang. You have already spent
$1,000 on repairs. At the last minute, the transmission dies.
You can pay $900 to have it repaired, or sell the car “as is.”

In each of the following scenarios, should you have the


transmission repaired? Explain.
A. Blue book value (what you could get for the car) is
$7,500 if transmission works, $6,200 if it doesn’t.
B. Blue book value is $6,300 if transmission works, $5,500
if it doesn’t.
Active Learning 1 Applying the principles

Cost of fixing the transmission = $900


A. Blue book value is $7,500 if transmission works,
$6,200 if it doesn’t
 Benefit of fixing transmission = $1,300
(= 7500 – 6200)
 Get the transmission fixed

B. Blue book value is $6,300 if transmission works,


$5,500 if it doesn’t
 Benefit of fixing the transmission = $800
(= 6300 – 5500)
 Do not pay $900 to fix it
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
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 and specialization
 Get a better price abroad for goods they
produce
 Buy other goods more cheaply from abroad
than could be produced at home
Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity

 Market
 A group of buyers and sellers (need not be in a
single location)

 “Organize economic activity” means determining


 What goods and services to produce
 How much of each to produce
 Who produced and consumed these
Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity

 Planned economy
 Market economy
 Decentralized decisions of many firms and
households – as they interact in markets

 Prices:
 Determined: interaction of buyers and sellers
 Reflect the good’s value to buyers
 Reflect the cost of producing the good
Principle 7: Governments Can Sometimes
Improve Market Outcomes

 Government - enforce property rights


 Enforce rules and maintain institutions that are
key to a market economy
 Government - promote efficiency/ Equality
 Avoid market failures: market left on its own
fails to allocate resources efficiently (pollution)
 Market power – source of market failure
(monopoly)
 Tax or welfare policies
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 most important determimant of
living standard, depends on equipements, skills,
technology
Principle 9: Prices rise when the government
prints too much money
 Inflation
Principle 10: Society faces a short-run trade-off
between inflation and unemployment

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