CTM acro CH 01 by 242CpTmR



                  The Big Ideas
10 Big Ideas in Economics:                6.   The importance of
                                               Wealth and Economic
     1.    Incentives Matter
     2.    Good Institutions align
                                          7.   Institutions matter
           Self-interest with the
           Social interest                8.   Economic booms and
                                               busts cannot be avoided
     3.    Trade-offs are
                                               but can be moderated
                                          9.   Prices rise when the
     4.    Thinking on the Margin
                                               government prints too
     5.    The Power of Trade                  much money
                                          10. Central banking is a
                                              hard job
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 questions                                                   Video
Food for Thought….

    Some good blogs and other sites to get the juices flowing:
Incentives in the Prisoner
Transport Business
Only when the ship captains began to be paid per
living convict on arrival did the death rate fall from
over 33% to less than 1%

             The British prison transport vessel “Success”   BACK TO
Big idea #1: Incentives Matter

                    Incentives: rewards
                    and penalties that
                    motivate behavior.

                       People respond to
                       incentives in
                       predictable ways.
                       Self-interest is an
                       important incentive in

                                         BACK TO
Big idea #2: Good Institutions Align
Self-interest with the Social Interest

 Markets magically align your self-
 interest with social interest (usually)

Because the cheese-
monger wants profit;
you get your cheese!

                                         BACK TO

              “It is not from the
                benevolence of the
                butcher, the brewer,
                or the baker that we
                expect our dinner, but
                from their regard to
                their own interest.”
                          -Adam Smith,
                      The Wealth of Nations

          Adam Smith saw the invisible hand
Big idea #3: Trade-offs are Everywhere

 For every choice something is gained,
 something lost.
 The Opportunity Cost of a choice: the
 value of the opportunities lost.
   AND people respond to changes in
   opportunity costs.
   Unemployment rates and college enrollment:

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Big idea #4: Thinking on the Margin

 Actual trade-offs are usually “on
 the margin.”
 Marginal means additional
 Most economic choices are
 marginal choices
 E.G. Newt Gingrich wanted
 mandatory executions for drug
 but the effect was to reduce the    Higher punishments
                                     for lesser crimes
 EXTRA penalty for murdering         reduce the
 police offers during arrest         marginal cost of
                                     harsher crimes.
                                              BACK TO
     Big idea #5: The Power of Trade
Hans Rosling's famous lectures combine enormous
quantities of public data with a sport's commentator's style
to reveal the story of the world's past, present and future
development. (4:48 minutes)


                                                           BACK TO
Big idea #6: The Importance of
Wealth and Economic Growth
 Wealth brings higher standards of living.
 Understanding economic growth is

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                      SEE THE INVISIBLE HAND

World Distribution of Income, 2000. Source: Penn World Tables
Big idea #7: Institutions Matter

 Why are some countries rich and
 others poor?
   Incentives are sometimes lacking.
 Strong institutions that support these
 incentives foster economic growth.

                                       BACK TO
Can you         North and
tell which      South
country has     Korea at
better          night
Big idea #8: Economic Booms and Busts
Cannot Be Avoided but Can Be Moderated

 Policymakers use Fiscal Policy and
 Monetary Policy to attempt to smooth
 out this economic volatility.

                              Can we make the
                              economy smoother?

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Big idea #9: Prices Rise When the Government
Prints Too Much Money
 Inflation is an increase in the general level
 of prices.
 Heavily indebted nations often print
 money to pay down debt.
   Zimbabwe: highest inflation ever

      Brother can you spare 10 million Zim dollars?
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Big idea #10: Central Banking
Is a Hard Job
 The Federal Reserve is the U.S.’s central
 “The Fed” is in charge of money supply
    Helping the economy be stable
    Balancing inflation and unemployment
    Preventing banking crises?

Ben Bernanke, Chairman of the Fed,
wondering where the nearest aspirin
supply is.

                                           BACK TO
  Try it!

As land prices near the U.S. coast
increase, what changes do you expect
to see in burial practices (other things
equal)? Think opportunity cost.
 a)   Traditional burials will increase and
      cremation will decrease.
 b)   Cremation will increase and
      traditional burials will decrease.
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True or false: As women’s wages
have risen over the past 50 years,
the opportunity cost of being a stay-
at-home mother has risen.
 a) True
 b) False

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          Would you expect to
          find companies
          developing cures for
          rare diseases or
          common ones? Think
          about incentives.
           a) Rare diseases
           b) Common diseases
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In which country would a person face a
lower opportunity cost for holding cash?
  a) Zimbabwe
  b) The U.S.

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