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1、1,Ten Principles of Economics,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,In this chapter, 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
2、of how the economy as a whole works?,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,What Economics Is All About,Scarcity: the limited nature of societys resources. Economics: the study of how society manages its scarce resources, e.g. how people decide what to buy, how much to work, save, and spend how firms
3、 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,0,0,The principles of HOW PEOPLE MAKE DECISIONS,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,
4、All decisions involve tradeoffs. Examples: Going to a party the night before your midterm leaves less time for studying. Having more money to buy stuff requires working longer hours, which leaves less time for leisure. Protecting the environment requires resources that could otherwise be used to pro
5、duce consumer goods.,Principle #1: People Face Tradeoffs,0,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,Society faces an important tradeoff: efficiency vs. equity efficiency: getting the most out of scarce resources equity: distributing prosperity fairly among societys members Tra
6、deoff: To increase equity, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.”,Principle #1: People Face Tradeoffs,0,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,Making decisions requires comparing
7、 the costs and benefits of alternative choices. The opportunity cost of any item is whatever must be given up to obtain it. It is the relevant cost for decision making.,Principle #2: The Cost of Something Is What You Give Up to Get It,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,E
8、xamples: The opportunity cost of going to college for a year is not just the tuition, books, and fees, but also the foregone wages. seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater.,Principle #2: The Cost of Something Is What You Give Up to Get I
9、t,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,A person is rational if she systematically and purposefully does the best she can to achieve her objectives. When making decisions, rational consumers and businesspeople evaluate the costs and benefits of marginal changes incremental
10、adjustments to an existing plan.,Principle #3: Rational People Think at the Margin,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,Examples: A student considers whether to go to college for an additional year, comparing the fees & foregone wages to the extra income he could earn with
11、 an extra year of education. A firm considers whether to increase output, comparing the cost of the needed labor and materials to the extra revenue.,Principle #3: Rational People Think at the Margin,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE MAKE DECISIONS,incentive: something that induces a p
12、erson to act, i.e. the prospect of a reward or punishment. Rational people respond to incentives. Examples: When gas prices rise, consumers buy more hybrid cars (e.g., Toyota Prius). When cigarette taxes increase, teen smoking falls.,Principle #4: People Respond to Incentives,A C T I V E L E A R N I
13、 N G 1: Exercise,You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? A. Blue book value is
14、$6500 if transmission works, $5700 if it doesnt B. Blue book value is $6000 if transmission works, $5500 if it doesnt,11,A C T I V E L E A R N I N G 1: Answers,Cost of fixing transmission = $600 A. Blue book value is $6500 if transmission works, $5700 if it doesnt Benefit of fixing the transmission
15、= $800 ($6500 5700). Its worthwhile to have the transmission fixed. B. Blue book value is $6000 if transmission works, $5500 if it doesnt Benefit of fixing the transmission is only $500. Paying $600 to fix transmission is not worthwhile.,12,A C T I V E L E A R N I N G 1: Answers,Observations: The $1
16、000 you previously spent on repairs is irrelevant. What matters is the cost and benefit of the marginal repair (the transmission). The change in incentives from scenario A to scenario B caused your decision to change.,13,0,The principles of HOW PEOPLE INTERACT,CHAPTER 1 TEN PRINCIPLES OF ECONOMICS,HOW PEOPLE INTERACT,Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. Countries als
