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.Economy. . . . . The word economy comes from a Greek word for “one who manages a household.”Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.A household and an economy face many decisions:uWho will work?uWhat goods and how many of them should be produced?uWhat resources should be used in production?uAt what price should the goods be sold?Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Society and Scarce Resources:The management of societys resources is important because resources are scarce.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Scarcity . . . . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.EconomicsEconomics is the study of how society manages its scarce resources. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Economists study. . . uHow people make decisions.uHow people interact with each other.uThe forces and trends that affect the economy as a whole.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ten Principles of Economics1. People face tradeoffs. 2. The cost of something is what you give up to get it. 3. Rational people think at the margin. 4. People respond to incentives.How People Make DecisionsHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ten Principles of Economics5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Governments can sometimes improve economic outcomes.How People InteractHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ten Principles of Economics8. The standard of living depends on a countrys production. 9. Prices rise when the government prints too much money. 10. 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.“There is no such thing as a free lunch!”Harcourt, 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.u Guns v. butteru Food v. clothingu Leisure time v. worku 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.uEfficiency means society gets the most that it can from its scarce resources.uEquity 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.uWhether to go to college or to work?uWhether to study or go out on a date?uWhether to go to class or sleep in?Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.2. The cost of something is what you give up to get it.The opportunity cost of an item is what you give up to obtain that item.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.uMarginal changes in costs or benefits motivate people to respond.uThe 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.uPeople gain from their ability to trade with one another.uCompetition results in gains from trading.uTrade allows people to specialize in what they do best.Har