Mankiw 2003 Principles of Economics - PowerPoint

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					Introduction to Economics

       D.W. Hedrick
         Fall 2003
        Instructional Method
• Primarily Lecture format with discussion,
  simulations, and video presentations
• Constructive discussion is welcomed
• Grading is based on five of seven quizzes
  (25%), three midterms (25% each), and an
  optional comprehensive final (replaces
  lowest midterm) – NO MAKEUPS GIVEN
        Instructional Method
• Suggestions for the study of economics
       Definition of Economics
• Mankiw’s definition
   – How Society manages its scarce resources
• Hedrick’s definition
   – How society chooses to allocate its scarce resources
     among competing demands to best satisfy human wants
• Alternative definitions
   – Economics is the study of choice.
   – Economics is what economist do.
  Scarcity and the Fundamental
    Questions of Economics
• Unlimited wants versus limited resources
• WHFM
  – What is to be produced?
  – How is to be produced?
  – For whom will it be produced?
        Economics as a Science
•   The scientific method
•   Normative vs. positive approaches
•   A brief history of economic thinking
•   The language of economics
The Ten principles of Economic
           Thinking
Categories of Basic Principles of
          Economics
• How people make decisions?
• How people interact?
• How does the economy work overall?
   How People Make Decisions
• Principle #1 - People face tradeoffs
  – Time allocation – an example of tradeoffs
  – Efficiency versus equity
  – Production Possibilities Frontier
   How People Make Decisions
• Principle #2 - The cost of something is what
  you have to give up to get it
  – Opportunity costs come from Von Weiser, a
    German economist late 1800s
  – Opportunity costs are independent of monetary
    units
  – TINSTAAFL
  – The real costs of going to college
   How People Make Decisions
• Principle #3 - Rational people think at the
  margin
  – Rational or irrational decision-making
  – Marginal benefits and costs versus total benefits
    and costs
  – Weighing marginal costs and benefits leads to
    maximizing net benefits (total welfare) *
   How People Make Decisions
• Principle #4 –People respond to incentives
   – Reactions to changes in marginal benefits and costs
   – Increases (decreases) in marginal benefits mean more
     (less) of an activity
   – Increases (decreases) in marginal costs mean less
     (more) of an activity
   – Example of seat belts leading to increased speeds
   – Example of SUV (with child car seat) in Issaquah
         How People Interact
• Principle #5 - Trade can make everybody
  better off
  – Adam Smith author of the “An Inquiry into the
    Causes and Consequences of the Wealth of
    Nations” 1776
  – Gains from the division of labor and
    specialization
  – Mercantilists perspectives
  – Example of why Ellensburg
         How People Interact
• Principle #6 - Markets are usually a good
  way of organizing economic activity
  – Feudal times and haciendas in the new world
  – The power of trade: cooperation versus conflict
  – Markets: prices and quantities traded, typical
    and abstract
         How People Interact
• Principle #6 - Markets are usually a good
  way of organizing economic activity
  creativity and productivity and resource
  allocation
  – “Failure” of centrally planned economies
  – “set it and forget it” becomes “compete or be
    obsolete”
         How People Interact
• Principle #7 Governments can sometimes
  improve market outcomes
  – Market signals can fail to allocate resources
    efficiently or equitably
  – Public goods, the exclusion principle, the free-
    rider problem and non-rival consumption
  – External costs and benefits
  – Examples: vaccines, education, pollution
         How People Interact
• Principle #7 Governments can sometimes
  improve market outcomes
  – Equitable or fair distribution of resources
  – Efficiency and equity: the pie analogy
  – Government Failure: is government
    intervention always the proper solution?
   How the Economy works as a
             Whole
• Principle # 8 – A country’s standard of living
  depends upon its ability to produce goods and
  services
   – Adam Smith’s “An Inquiry into the Nature and the
     Consequences of the Wealth of Nations”
   – Materialism – more toys mean more welfare
   – wealth: a necessary or sufficient condition for
     happiness (are rich people happier, children with lots of
     toys)
  How the Economy works as a
            Whole
• Principle # 8 – A country’s standard of
  living depends upon its ability to produce
  goods and services
  – leisure time and productivity
  – the factors of production: land or natural
    resources, labor, capital, entrepreneurship
  – technology and productivity
  – the rule of 72 for growth rates
  How the Economy works as a
            Whole
• Principle #9 – The general level of prices
  rises when the government prints and
  distributes too much money
  – Definition of money, and economic language
  How the Economy works as a
            Whole
• Principle #9 – The general level of prices
  rises when the government prints and
  distributes too much money
  – Examples: “Not worth a continental” and
    Argentina
  – Establish of the Federal Reserve and the
    introduction of sustained inflation in the US
  How the Economy works as a
            Whole
• Principle #10 – Society faces a short-run
  tradeoff between inflation and
  unemployment
  – Short-run and the long-run
  – Demand and supply shocks
  – Short-run increases (decreases) in output above
    (below) long-run potential output lead to
    adjustments
How the Economy works as a
          Whole
• Principle #10 – Society faces a short-run
       tradeoff between inflation and
               unemployment
– Counter-cyclical stabilization versus pro-
  cyclical destabilization
– Political business cycles

				
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