lecture 1 ten principles of economics

Ten principles of economics

Lecture 1

to understand what is economics about

to see how people make decisions

to know how people interact

to understand how the economy as a whole works

Objectives


29.09.2015 2

What is economics about?


Origin of the word economy?

Gr. Oikonomos = one who manages a household

Scarcity - society has limited resources and therefore cannot produce all the

goods and services people wish to have

Economics is the study of how society manages its scarce resources

29.09.2015 3



How people make decisions

1. People face trade-offs

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 interact

5. Trade can make everyone better off

6. Markets are usually a good way to organize

economic activity

7. Governments can sometimes improve market

outcome

How the economy as a whole

works

8. A county’s standard of living depends on its

ability to produce goods and services

9. Prices rise when the government prints too

much money

10. Society faces a short-run trade-off between

inflation and unemployment

29.09.2015 4



1. People Face Trade-offs

job – education

How do you spend your money?

Efficiency - equality

2. The Cost of Something Is What You Give Up to Get It

What is the cost of attending the faculty?

opportunity cost - what you give up to get that item

29.09.2015 5



3. Rational People Think at the Margin

What are rational people?

Example: coach company, airplane company, last-minute holidays

Rational people often make decisions by comparing marginal benefits and marginal

costs.

4. People Respond to Incentives

what happens when the price of holidays rises in Turkey?

what is the effect of a new / increased tax on gasoline? Or on alcohol (since 1

September 2013)?

29.09.2015 6

How people interact


5. Trade Can Make Everyone Better Off

Why do we trade?

6. Markets Are Usually a Good Way to Organize Economic Activity

centrally planned economy – market economy

Invisible hand and government intervention

7. Governments Can Sometimes Improve Market Outcomes

the invisible hand can work its magic only if the government enforces the rules and

maintains the institutions that are key to a market economy

property rights, market failure (externality), market power

29.09.2015 7

How economy as a whole works


8. A Country’s Standard of Living Depends on Its Ability to Produce Goods

and Services

How do you explain the differences in living standards around the world?

productivity

9. Prices Rise When the Government Prints Too Much Money

inflation

hyperinflation

29.09.2015 8

How economy as a whole works


10. Society Faces a Short-Run Trade-off between Inflation and

Unemployment

Unemployment

Increasing the amount of money increase demand and increase the inflation

companies hire new workers decrease unemployment

Usually politicians are interested in reducing unemployment

29.09.2015 9

Conclusions


people face trade-offs among alternative goals

the cost of any action is measured in terms of forgone opportunities

rational people make decisions by comparing marginal costs and marginal benefits

people change their behavior in response to the incentives they face

trade and interdependence can be mutually beneficial

markets are usually a good way of coordinating economic activity

the government can potentially improve market outcomes by remedying a market failure or by

promoting greater economic equality

productivity is the ultimate source of living standards

growth in the quantity of money is the ultimate source of inflation

society faces a short-run trade-off between inflation and unemployment

29.09.2015 10

scarcity = raritate

efficiency = eficiență

equality = egalitate

oportunity cost = cost de oportunitate

marginal change = modificare marginală

incentive = stimulent

property rights = drepturi de proprietate

market failure = eșecul pieței

externality = externalitate

productivity = productivitate

inflation = inflație

hyperinflation = hiperinflație

business cycle = ciclu economic

household = gospodărie

Vocabulary


29.09.2015 11

Mankiw N.G. – Principles of Economics (Sixth Edition), South-Western

Cengage Learning, 2012, p. 3 - 20

Bibliography


29.09.2015 12

lecture 1 ten principles of economics

Documents

people interactto

services people

principles of economicsorigin

incentiveshow people

principles of economicslecture

word economy

market power29

opportunity cost