Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.A Lecture Presentation in PowerPoint to AccompanyPrinciples of EconomicsSecond Edition by N. Gregory MankiwPrepared by Mark P. Karscig, Department of Economics & Finance, Central Missouri State University.Ten Principles of EconomicsChapter 1Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of the work should be mailed to:Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Economists study. . . ?How people make decisions.?How people interact with each other.?The forces and trends that affect the economy as a whole.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ten Principles of Economics? 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.How People Make DecisionsHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ten Principles of Economics? Trade can make everyone better off. ? Markets are usually a good way to organize economic activity. ? Governments can sometimes improve economic outcomes.How People InteractHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ten Principles of Economics? The standard of living depends on a countrys production. ? Prices rise when the government prints too much money. ? Society faces a short-run tradeoff between inflation and unemployment.How the Economy as a Whole WorksHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.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. equityMaking decisions requires trading off one goal against another.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.1. People face tradeoffs.?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.Efficiency v. EquityHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.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?Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.3. Rational people think at the margin.Marginal changes are small, incremental adjustments to an existing plan of action.People make decisions by comparing costs and benefits at the margin.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.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 alternatives marginal benefits exceed its marginal costs!Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.LA Laker basketball star Kobe Bryant chose to skip college and go straight to the NBA from high school when offered a $10 million contract.4. People respond to incentives.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.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.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.6. Markets are usually a good way to organize economic activity.?In a market economy, households decide what to buy and who to work for.?Firms decide who to hire and what to produce. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.6. Markets are usually a good way to organize economic activity.?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.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.7. Governments can sometimes improve market outcomes.When the market fails (breaks down) government can intervene to promote efficiency and equity.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.7. Governments can sometimes improve market outcomes.Market failure occurs when the market fails to allocate resources efficiently.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.7. Governments can sometimes improve market outcomes.Market failure may be caused by an externality, which is the impact of one person or firms actions on the well-being of a b