ten principles

7/21/2019 Ten Principles

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10 PRINCIPA EKONOMIJE


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1INTRODUCTION


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Copyright 2004 South-!"t!r#$Tho%"o# &!'r#i#g

11T!# Pri#(ip)!" o*E(o#o%i("


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TEN PRINCIPLES OFECONOMICS

A household and an economy

face many decisions:

Who will work?

What goods and how many of them should beroduced?

What resources should be used in roduction?

At what rice should the goods be sold?


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!ociety and !carce "esources:

The management of society#s resources is

imortant because resources are scarce.

Scarcity. . . means that society has limited resources

and therefore cannot roduce all the goods and

ser$ices eole wish to ha$e.


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Economicsis the study of how society manages

its scarce resources.


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%ow eole make decisions.

&eole face tradeoffs.

The cost of something is what you gi$e u to get it.

"ational eole think at the margin.

&eole resond to incenti$es.


9/30Copyright 2004 South-!"t!r#$Tho%"o# &!'r#i#g


%ow eole interact with each other.

Trade can make e$eryone better off.

'arkets are usually a good way to organi(e

economic acti$ity. Go$ernments can sometimes imro$e economic

outcomes.




The forces and trends that affect how the

economy as a whole works.

The standard of li$ing deends on a country#s

roduction. &rices rise when the go$ernment rints too much

money.

!ociety faces a short)run tradeoff between inflationand unemloyment.



Principle #1: People Face Tradeoffs.

There is no such thing as a free lunch*



Main! decisions re"ires $radin!

off one !oal a!ains$ ano$%er.

Principle #1: People Face Tradeoffs.

To get one thing+ we usually ha$e to gi$e u

another thing.

Guns $. butter

,ood $. clothing

-eisure time $. work

fficiency $. e/uity



Principle #1: People Face Tradeoffs

fficiency $. /uity

Efficiencymeans society gets the most that it can

from its scarce resources.

Equitymeans the benefits of those resources aredistributed fairly among the members of society.



Principle #&: T%e Cos$ of Some$%in! Is '%a$(o )i*e +p $o )e$ I$.

0ecisions re/uire comaring costs and benefits

of alternati$es.

Whether to go to college or to work? Whether to study or go out on a date?

Whether to go to class or slee in?

The opportunity costof an item is what yougi$e u to obtain that item.



Principle #&: T%e Cos$ of Some$%in! Is '%a$(o )i*e +p $o )e$ I$.

-A -aker basketball star

1obe 2ryant chose to

ski college and gostraight from high

school to the ros where

he has earned millions

of dollars.



People mae decisions ,y comparin!

cos$s and ,enefi$s a$ $%e mar!in.

Principle #-: Ra$ional People T%in a$ $%eMar!in.

Marginal changesare small+ incremental

ad3ustments to an e4isting lan of action.



Principle #: People Respond $o Incen$i*es.

'arginal changes in costs or benefits moti$ate

eole to resond.

The decision to choose one alternati$e o$er

another occurs when that alternati$e#s marginalbenefits e4ceed its marginal costs*



Principle #/: Trade Can Mae E*eryone0e$$er Off.

&eole gain from their ability to trade with one

another.

5ometition results in gains from trading.

Trade allows eole to seciali(e in what they

do best.



Principle #: Mare$s 2re +sally a )ood'ay $o Or!ani3e Economic 2c$i*i$y.

A market economyis an economy that allocates

resources through the decentrali(ed decisions of

many firms and households as they interact in

markets for goods and ser$ices. %ouseholds decide what to buy and who to work

for.

,irms decide who to hire and what to roduce.



Principle #: Mare$s 2re +sally a )ood'ay $o Or!ani3e Economic 2c$i*i$y.

Adam !mith made the obser$ation that

households and firms interacting in markets act

as if guided by an in$isible hand.

2ecause households and firms look at rices whendeciding what to buy and sell+ they unknowingly

take into account the social costs of their actions.

As a result+ rices guide decision makers to reachoutcomes that tend to ma4imi(e the welfare of

society as a whole.



Principle #4: )o*ernmen$s Can Some$imesImpro*e Mare$ O$comes.

Market failureoccurs when the market fails toallocate resources efficiently.

When the market fails 6breaks down7

go$ernment can inter$ene to romote efficiencyand e/uity.



Principle #4: )o*ernmen$s Can Some$imesImpro*e Mare$ O$comes.

'arket failure may be caused by

an externality+ which is the imact of one erson or

firm#s actions on the well)being of a bystander.

market power+ which is the ability of a singleerson or firm to unduly influence market rices.



Principle #5: T%e S$andard of Li*in! 6ependson a Con$ry7s Prodc$ion.

!tandard of li$ing may be measured in differentways:

2y comaring ersonal incomes.

2y comaring the total market $alue of a nation#sroduction.




Almost all $ariations in li$ing standards are

e4lained by differences in countries#

roducti$ities.

Productivityis the amount of goods andser$ices roduced from each hour of a worker#s

time.




!tandard of li$ing may be measured in different

ways:

2y comaring ersonal incomes. 2y comaring the total market $alue of a nation#s

roduction.



Principle #8: Prices Rise '%en $%e)o*ernmen$ Prin$s Too Mc% Money.

8nflation is an increase in the o$erall le$el ofrices in the economy.

9ne cause of inflation is the growth in the

/uantity of money.

When the go$ernment creates large /uantities

of money+ the $alue of the money falls.



Principle #19: Socie$y Faces a S%or$rnTradeoff 0e$;een Infla$ion and+nemploymen$. The &hillis 5ur$e illustrates the tradeoff

between inflation and unemloyment:

8nflationnemloyment

8t#s a short)run tradeoff*


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Smmary

When indi$iduals make decisions+ they facetradeoffs among alternati$e goals.

The cost of any action is measured in terms of

foregone oortunities.

"ational eole make decisions by comaring

marginal costs and marginal benefits.

&eole change their beha$ior in resonse to the

incenti$es they face.


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Smmary

Trade can be mutually beneficial.

'arkets are usually a good way of coordinating

trade among eole.

Go$ernment can otentially imro$e market

outcomes if there is some market failure or if

the market outcome is ine/uitable.


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Smmary

&roducti$ity is the ultimate source of li$ingstandards.

'oney growth is the ultimate source of

inflation.

!ociety faces a short)run tradeoff between

inflation and unemloyment.

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