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Principles of Economics

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					PRINCIPLES OF ECONOMICS
Lecturer: Jack Wu
 Economics 101
WHAT IS ECONOMY?
 The word economy originally comes from a Greek
  word for “one who manages a household.”
 Broader definition: household, society, and
  country.
 Taiwan was called Newly Industrialized
  Economy (NIE) or Country (NIC).
FUNDAMENTAL PROBLEM FACED
BY ECONOMY
 Fundamental     economic problem: scarce resources.
 -- Scarcity. . . means that society has limited
 resources and therefore cannot produce all the
 goods and services people wish to have.
WHAT IS ECONOMICS?
 Economics is the study of how society manages
  its scarce resources.
 It comprises of Microeconomics and
  Macroeconomics.
MICROECONOMICS
   Microeconomics: the study of how households and
    firms make decisions and how they interact in
    markets (Econ 101: introductory Microeconomics,
    Econ 201: intermediate Microeconomics)
MACROECONOMICS
   Macroeconomics: the study of economy-wide
    phenomena including inflation, unemployment,
    and economic growth (Econ 102: Introductory
    Macroeconomics, Econ 202: Intermediate
    Macroeconomics)
EVERYBODY SHOULD LEARN
ECONOMICS
   <Reason>. Economics is a subject that we must
    confront in our everyday lives. As a matter of
    fact, we already spend a great deal of our time
    thinking about economic issues: prices(inflation),
    incomes (economic growth), consumption
    decisions, use of our time, job opportunity
    (unemployment), and so on.
MICRO AND MACRO EFFECTS
 Event: An increase in gasoline price
 _ Micro effect: vehicle driver, bicycle market,
  electricity
 _Macro effect: inflation, unemployment
TEN PRINCIPLES OF ECONOMICS
   How people make decisions. (4 principles)

   How people interact with each other. (3
    principles)

   The forces and trends that affect how the
    economy as a whole works. (3 principles)
How People Make
Decisions
PRINCIPLE #1: PEOPLE FACE
TRADEOFFS.
 There is no such thing as a free lunch.
 To get one thing, we usually have to give up
  another thing.
 Making decisions requires trading
  off one goal against another.
EXAMPLES OF TRADE OFF
 How a student spends her time
 How a family decides to spend its income

 How the Taiwanese government spends tax
  dollars
 How regulations may protect the environment at
  a cost to firm owners
SPECIAL EXAMPLE OF TRADEOFF
 Efficiency   v. Equity
   Efficiency means society gets the most that it can
    from its scarce resources.
   Equity means the benefits of those resources are
    distributed fairly among the members of society.

  Example: Tax paid by wealthy Taiwanese and then
    distributed to those less fortunate.
  Outcome: Increased equity and reduced efficiency
PRINCIPLE #2: THE COST OF
SOMETHING IS WHAT YOU GIVE UP
TO GET IT.
   Decisions require comparing costs and benefits of
    alternatives.
       Whether to go to college or to work?

   The opportunity cost of an item is what you give
    up to obtain that item.
                QUICK QUIZ
   What are the costs of going to college?
    _ Tuition costs?
    _ Room and board?
    _ Forgone pay?
                 QUICK QUIZ
 What  is the opportunity cost of seeing a movie?
  _ cost of admission?
  _ time cost of going to the theater?
  _ time cost of attending the show?

Note: Time cost depends on what else you might do
 with that time. Examples: staying at home and
 watch TV, working an extra three hours at paid
 job.
PRINCIPLE #3: RATIONAL PEOPLE THINK
AT THE MARGIN

 Many decisions in life involve incremental
  decisions: should I take another course this
  semester?
 Marginal changes are small, incremental
  adjustments to an existing plan of action.
 People make decisions by comparing costs and
  benefits at the margin.
PRINCIPLE #4: PEOPLE RESPONDS TO
INCENTIVES
 Because people make decisions by weighing costs
  and benefits, their decisions may change in
  response to changes in costs and benefits.
 Example: Seat Belt Laws increase use of seat
  belts and lower the incentives of individuals to
  drive safely.
   How People Interact
PRINCIPLE #5: TRADE CAN MAKE
EVERYONE BETTER OFF
 People gain from their ability to trade with one
  another.
 Competition results in gains from trading.

 Trade allows people to specialize in what they do
  best.

   Examples: Most families do not build their own
    homes, make their own clothes, or grow their own
    food.
PRINCIPLE #6: MARKETS ARE USUALLY
A GOOD WAY TO ORGANIZE ECONOMIC
ACTIVITY
 A market economy is an economy that allocates
  resources through the decentralized decisions of
  many firms and households as they interact in
  markets for goods and services.
 Adam Smith made the observation that
  households and firms interacting in markets act
  as if guided by an “invisible hand”—Market
  Prices.
PRINCIPLE #7: GOVERNMENT CAN
SOMETIMES IMPROVE MARKET
OUTCOMES
 Market failure occurs when the market fails to
  allocate resources efficiently.
 Market failure may be caused by
     an externality, which is the impact of one person or
      firm’s actions on the well-being of a bystander.
     market power, which is the ability of a single
      person or firm to unduly influence market prices.
   When the market fails (breaks down) government
    can intervene to promote efficiency and equity.
   How the Economy as a
    Whole Works
PRINCIPLE #8: THE STANDARD OF
LIVING DEPENDS ON A COUNTRY’S
PRODUCTION
   Standard of living may be measured in different
    ways:
     By comparing personal incomes.
     By comparing the total market value of a nation’s
      production (GDP, Gross Domestic Product).
 Almost all variations in living standards are
  explained by differences in countries’
  productivities.
 Productivity is the amount of goods and services
  produced from each hour of a worker’s time.
PRINCIPLE #9:PRICES RISE WHEN THE
GOVERNMENT PRINTS TOO MUCH
MONEY
 Inflation is an increase in the overall level of
  prices in the economy.
 One cause of inflation is the growth in the
  quantity of money.
 When the government creates large quantities of
  money, the value of the money falls.
PRINCIPLE #10: SOCIETY FACES A
SHORT-RUN TRADEOFF BETWEEN
INFLATION AND UNEMPLOYMENT
   The Phillips Curve illustrates the tradeoff
    between inflation and unemployment:
     Inflation is lower  Unemployment is higher

It’s a short-run tradeoff!

				
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posted:10/1/2011
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