PowerPoint® Lecture Presentation
to accompany
Principles of Microeconomics, 3rd Canadian Edition
Mankiw, Kneebone, McKenzie, Rowe
Prepared by
Mark P. Karscig, Central Missouri State University and Linda M. Manning, University of Ottawa.
PART 1
INTRODUCTION
Ten Principles of
1
Economics
Copyright © 2006, Nelson, a division of Thomson Canada Ltd.
Learning Objectives
● Learn that economics is about allocation of scarce
resources
● Examine some of the tradeoffs that people face
● Learn the meaning of opportunity costs
● See how to use marginal reasoning when making decisions
● Discuss how incentives affect people’s behaviour
● Consider why trade among people or nations can be good
for everyone
● Discuss why markets are a good, but not perfect, way to
allocate resources
● Learn what determines some trends in the overall economy
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Economy. . .
. . . The word economy comes from a Greek
word for “one who manages a household.”
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
TEN PRINCIPLES OF ECONOMICS
● A household and an economy face many
decisions:
Who will work?
What goods and how many of them should be
produced?
What resources should be used in production?
At what price should the goods be sold?
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
TEN PRINCIPLES OF ECONOMICS
● Economics is the study of how society manages
its scarce resources.
resources
The management of society’s resources is important
because resources are scarce.
Scarcity.
Scarcity . . means that society has limited resources
and therefore cannot produce all the goods and
services people wish to have.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
TEN PRINCIPLES OF ECONOMICS
● How people make decisions.
People face tradeoffs.
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
TEN PRINCIPLES OF ECONOMICS
● How people interact with each other.
Trade can make everyone better off.
Markets are usually a good way to organize economic
activity.
Governments can sometimes improve economic
outcomes.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
TEN PRINCIPLES OF ECONOMICS
● Trends and forces that affect how the economy
as a whole works.
The standard of living depends on a country’s
production.
Prices rise when the government prints too much
money.
Society faces a short-run tradeoff between inflation and
unemployment.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #1:
People Face Tradeoffs.
“There is no such thing as a free lunch!”
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #1:
People Face Tradeoffs.
To get one thing, we usually have to give up
another thing.
Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity
Making
Making decisions
decisions requires
requires trading
trading
off
off one
one goal
goal against
against another.
another.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #1:
People Face Tradeoffs
● Efficiency v. Equity
Efficiency means society gets the most that it can from
its scarce resources.
Equity means the benefits of those resources are
distributed fairly among the members of society.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #2:
The Cost of Something Is What You Give Up to Get It.
● Decisions require comparing costs and benefits
of alternatives.
Whether to go to college or to work?
Whether to study or go out on a date?
Whether to go to class or sleep in?
● The opportunity cost of an item is what you give
up to obtain that item.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #3:
Rational People Think at the Margin
● Marginal changes are small, incremental
adjustments to an existing plan of action.
People
People make
make decisions
decisions byby comparing
comparing
costs
costs and
and benefits
benefits at
at the
the margin.
margin.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #4:
People Respond to Incentives.
● Marginal changes in costs or benefits motivate
people to respond.
● The decision to choose one alternative over
another occurs when that alternative’s marginal
benefits exceed its marginal costs!
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #5:
Trade Can Make Everyone Better Off.
● People gain from their ability to trade with one
another.
● Competition results in gains from trading.
● Trade allows people to specialize in what they do
best.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #6:
Markets Are Usually a Good Way
to Organize Economic Activity.
● A market economy is an economy that allocates
resources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
Households decide what to buy and who to work for.
Firms decide who to hire and what to produce.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #6:
Markets Are Usually a Good Way
to Organize Economic Activity.
● Adam Smith made the observation that
households and firms interacting in markets act
as if guided by an “invisible hand.”
Because households and firms look at prices when
deciding what to buy and sell, they unknowingly take
into account the social costs of their actions.
As a result, prices guide decision makers to reach
outcomes that tend to maximize the welfare of society
as a whole.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #7:
Governments Can Sometimes Improve
Market Outcomes.
● Market failure occurs when the market fails to
allocate resources efficiently.
● When the market fails (breaks down) government
can intervene to promote efficiency and equity.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #7:
Governments Can Sometimes Improve
Market Outcomes.
● Market failure may be caused by
an externality,
externality which is the impact of one person or
firm’s actions on the well-being of a bystander.
market power,
power which is the ability of a single person or
firm to unduly influence market prices.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #8:
The Standard of Living Depends on a
Country’s Production.
● Standard of living may be measured in different
ways:
By comparing personal incomes.
By comparing the total market value of a nation’s
production.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #8:
The Standard of Living Depends on a
Country’s Production.
● Standard of living may be measured in different
ways:
By comparing personal incomes.
By comparing the total market value of a nation’s
production.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #8:
The Standard of Living Depends on a
Country’s Production.
● Almost all variations in living standards are
explained by differences in countries’
productivities.
● Productivity is the amount of goods and services
produced from each hour of a worker’s time.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #9:
Prices Rise When the Government
Prints Too Much Money.
● Inflation is an increase in the overall level of
prices in the economy.
● One cause of inflation is the growth in the
quantity of money.
● When the government creates large quantities of
money, the value of the money falls.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Principle #10:
Society Faces a Short-run Tradeoff
Between Inflation and Unemployment.
● The Phillips Curve illustrates the tradeoff between
inflation and unemployment:
Inflation Unemployment
It’s a short-run tradeoff!
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Summary
● When individuals make decisions, they face
tradeoffs among alternative goals.
● The cost of any action is measured in terms of
foregone opportunities.
● Rational people make decisions by comparing
marginal costs and marginal benefits.
● People change their behavior in response to the
incentives they face.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Summary
● Trade can be mutually beneficial.
● Markets are usually a good way of coordinating
trade among people.
● Government can potentially improve market
outcomes if there is some market failure or if the
market outcome is inequitable.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Summary
● Productivity is the ultimate source of living
standards.
● Money growth is the ultimate source of inflation.
● Society faces a short-run tradeoff between
inflation and unemployment.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
