ECON202, Maclachlan, Spring 2005 1

TEN PRINCIPLES OF ECONOMICS

Week 1, Chapter 1

ECON202, Maclachlan, Spring 2005 2

ECONOMY

From the Greek for one who manages a household.

Key concept: scarcity.

ECON202, Maclachlan, Spring 2005 3

Definition

Economics: the study of how society manages its scarce resources.

Mankiw summarizes all of economics with 10 principles …

ECON202, Maclachlan, Spring 2005 4

1. People face trade-offs.

ECON202, Maclachlan, Spring 2005 5

2. The cost of something is what you give up to get it.

ECON202, Maclachlan, Spring 2005 6

3. Rational people think at the margin.

ECON202, Maclachlan, Spring 2005 7

4. People respond to incentives.

ECON202, Maclachlan, Spring 2005 8

5. Trade can make everyone better off.

ECON202, Maclachlan, Spring 2005 9

6. Markets are usually a good way to organize economic

activity.

ECON202, Maclachlan, Spring 2005 10

Governments can sometimes improve market outcomes.

ECON202, Maclachlan, Spring 2005 11

8. A country’s standard of living depends on its ability to produce

goods and services.

ECON202, Maclachlan, Spring 2005 12

9. Prices rise when the government prints too much money.

ECON202, Maclachlan, Spring 2005 13

10. Society faces a short-run tradeoff between inflation and unemployment.

ECON202, Maclachlan, Spring 2005 14

Economists as Advisors

Harry Truman said he wanted a one-armed economist.

ECON202, Maclachlan, Spring 2005 15

Ten Things Economists Agree On

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)

2. Tariffs and import quotas usually reduce general economic welfare. (93%)

3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)

4. Fiscal policy has a significant stimulative impact on a less than fully employed economy. (90%)

ECON202, Maclachlan, Spring 2005 16

5. If the federal budget deficit is to be balanced, it should be done over the business cycle rather than yearly. (85%)

6. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)

7. A large federal budget deficit has an adverse effect on the economy. (83%)

8. A minimum wage increases unemployment among young and unskilled workers. (79%)

ECON202, Maclachlan, Spring 2005 17

9. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)

10. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

ECON202, Maclachlan, Spring 2005 18

Thinking Like an Economist

Chapter 2

ECON202, Maclachlan, Spring 2005 19

Scientific Methodology

“The whole of science is nothing more than the refinement of everday thinking.”

--Albert Einstein

ECON202, Maclachlan, Spring 2005 20

Observation

Theory

More Observation

ECON202, Maclachlan, Spring 2005 21

Role of Assumptions

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore.

The physicist says, "Lets smash the can open with a rock."

The chemist says, "Lets build a fire and heat the can first."

The economist says, "Lets assume that we have a can-opener...“

--Paul Samuelson

ECON202, Maclachlan, Spring 2005 22

The Production Possibilities Frontier

ECON202, Maclachlan, Spring 2005 23

A Shift in the Production Possibilities Frontier

ECON202, Maclachlan, Spring 2005 24

The Circular Flow

ECON202, Maclachlan, Spring 2005 25

Microeconomics vs. Macroeconomnics

Micro: the study of how households and firms make decisions and how they interact in markets.

Macro: the study of economy-wide phenomena, including inflation, unemployment and growth

ECON202, Maclachlan, Spring 2005 26

Positive vs. Normative Statements

Positive statements: claims that attempt to describe the world as it is.

Normative statements: claims that attempt to prescribe how the world should be.

ECON202, Maclachlan, Spring 2005 27

Figure A-1 Types of Graphs

ECON202, Maclachlan, Spring 2005 28

Figure A-2 Using the Coordinate System

Table A-1 Novels Purchased by Emma

Copyright©2003 Southwestern/Thomson Learning

ECON202, Maclachlan, Spring 2005 30

Figure A-3 Demand Curve

ECON202, Maclachlan, Spring 2005 31

Figure A-4 Shifting Demand Curves

ECON202, Maclachlan, Spring 2005 32

Figure A-5 Calculating the Slope of a Line

ECON202, Maclachlan, Spring 2005 33

Figure A-6 Graph with an Omitted Variable

ECON202, Maclachlan, Spring 2005 34

Figure A-7 Graph Suggesting Reverse Causality