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V # 

$one


$one who
household%
manages a household%






 
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( 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?





 
'
2ociety and 2carce Resources:
) The management of society¶s
resources is important because
resources are scarce.
) 2
 . . . means that society has
limited resources and therefore cannot
produce all the goods and services
people wish to have.






 
*
? Y  is the study of how society
manages its scarce resources.
? Yconomists study how people make
decisions:
? How much they work
? What they buy
? How much they save
? How they invest their savings





 
+
? Yconomists also study how people
interact such as buyers and sellers.
? Price determination.
? Yconomists also analyze forces and
trends that affect the economy as a whole.
? Growth in average income
? The rate of price increase.






 
,
? There is no mystery to what an ³economy´
is.
? It¶s a group people interacting with one
another as they go about their lives.
? We start the study of economics with four
principles of individual decision making:
? 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. 


 
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 ³m

 
 




 
? To get something we like we usually have
to give up something we don¶t like.
? A student and her time:
? 2tudying ! napping or cycling.
? 2ociety¶s tradeoffs:
? Guns ! Ñutter
? álean environment and higher income





 
.
? 2ociety¶s tradeoffs (cont¶d):
? Yfficiency ! Y uity
? Yfficiency: 2ociety getting the most it
can from its scarce resources.
? Y uity: Distributing economic
prosperity fairly among the members of
society.






 

? ÿaking decisions re uires comparing
the   and 

 of alternative
courses of actions.
? To go to university or not to go?
? Opportunity cost: Whatever must be
given up to obtain some item.






 

? ÿarginal changes: 2mall incremental
adjustments to marginal changes.
? Individuals and firms can make better
decisions by thinking at the margin.
? Ñy comparing the 




(ÿÑ) with the associated 

  
(ÿá) of a decision.






 
"
 Principle 4: People Respond to
Incentive
( ÿarginal changes in costs or benefits
motivate people to respond.
) When the price of apples rise«
( The decision to choose one alternative
over another occurs when that
alternative¶s marginal benefits exceed its
marginal costs!






 
&
 HOW PYOPLY INTYRAáT

( The first four principles discussed how

individuals make decisions.
( The next three principles concern how
people interact with one another.






 
'
 Principle 5: Trade can ÿake
Yveryone Ñetter Off

° People gain from their ability to trade with

one another.
( áompetition results in gains from trading.
( Trade allows people to specialize in what
they do best.






 
*
Principle 6: ÿarkets are Usually a
Good Way to Organize Yconomic
Activity
? ÿarket economy: An economy that allocates
resources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.

? Firms decide whom to hire and what to make.

? Households decide which firms to work for and

what to buy with their incomes.





 
+
Principle 6: ÿarkets are Usually a
Good Way to Organize Yconomic
Activity
? ÿarket economy: An economy that
allocates resources through the
decentralized decisions of many firms and
households as they interact in markets for
goods and services.
? Firms decide whom to hire and what to
make.
? Households decide which firms to work
for and what to buy with their incomes. 




 
,
 Principle 7: Governments can
2ometimes Improve ÿarket
Outcomes
? When the ! 

 does not work.
? ÿarket failure: A solution in which a market left
on its own fails to allocate resources
efficiently.
? Yxternality: The impact of one person¶s actions
on the well-being of a bystander.
? ÿarket power: The ability of a single economic
actor (or small group of actors) to have a
substantial influence on market prices.





 
-
 HOW THY YáONOÿ A2 A
WHOLY WORK2
? The last three principles concern the workings of
the economy as a whole.






 
.
Principle 8: A áountry¶s 2tandard
of Living Depends on its Ability to
Produce Goods and 2ervices
? 2

 ! may be measured in
different ways (e.g. personal income or total
market value of a nation¶s production.)
) Differences in standard of living between
countries or even provinces is attributable to
the Ú
! of the country or province.
? ë
!: The amount of goods and
services produced from each hour of a
worker¶s time.



ë
! 2

 ! 


 

Principle 9: Prices Rise when the
Government Prints Too ÿuch
ÿoney
? In Afghanistan«
? In January 1991, a daily newspaper cost Afs. 3.
? In November 1998, the same paper cost 70 000
Afs.
? Inflation: An increase in the overall level of
prices in the economy.
( One cause of inflation is the growth in the
uantity of money.
( When the government creates large uantities of
money, the value of the money falls. 




 

 Principle 10: 2ociety Faces a
2hort--Run Tradeoff Ñetween
2hort
Inflation and Unemployment.

? Phillips curve: A curve that shows the

short-run tradeoff between inflation and
unemployment.






 
"
( 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.





 
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( Trade can be mutually beneficial.
( ÿarkets 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
ine uitable.
( Productivity is the ultimate source of
living standards.





 
'
( ÿoney growth is the ultimate source of
inflation.
( 2ociety faces a short-run tradeoff between
inflation and unemployment.






 
*





 
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