10 principles of economics
DESCRIPTION
10 organizing principles for thinking about macroeconomics.TRANSCRIPT
10 Principles of Economics
Acknowledgement
• Based on the ideas presented in the book Principles of Macroeconomics by N. Gregory Mankiw
How People Make Decisions
1. People Face Tradeoff
• Time• Guns and Butter• No such thing as a pure
benefit• Efficiency and Equality• Short term vs Long term• Distortions
2. Costs
• Costs• Benefits• Courses of Action• Decisions• Opportunity Cost
3. Thinking at the Margin
• Firms maximize profits• People: highest level of
satisfaction• Incremental adjustment
to an existing plan of action
• Marginal benefits vs marginal cost
• Average cost vs. marginal cost.
4. Incentives
• People respond to incentives.
• Carrot and Stick• Plata o plumbo • Prices: how a market
economy allocates scarce resources.
• Government Policy decisions
• Unintended consequences
How People Interact
5. Trade
• Competition• Zero Sum Games• Specialize• Greater variety of goods
at lower cost• All boats rise on a rising
tide• Partners
6. Markets
• Organize Economic Activity
• Allocate scarce resources• Collapse of Communism• Market Economy:
– Decentralized , self-interested decision makers
– Remarkably successful in promoting overall economic well-being
Invisible Hand
• Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable outcomes.
• Coordinates individual decisions toward overall economic well-being
• Adam Smith 1776
7. Government Policy
• Proper role and Scope• Enforce the rules• Maintain Institutions• Police and Courts• Ability to enforce our
rights• Promote efficiency • Promote equality
How the Economy as a Whole Works (or doesn’t)
Standard of Living
• Ability to Produce Goods and Services
• Quality of Life– Based on material goods
and services
• Growth• Productivity• Education• Tools • Technology
Inflation
• Prices rise with increase in Money Supply
• Leveraging money through banks and lending
• How dollars get printed and injected into the Money Supply
• Money Supply vs. Interest Rates
Inflation vs. Unemployment
• Short-term effect of $ injection stimulates spending and demand for goods
• Trade-offs• Business Cycle• Policy instruments• Stimulus• Role of Federal Reserve
10 Principles of Economics• How People Make Decisions
– People Face Trade-offs– Rational People Think at the Margin– People Respond to Incentives
• How People Interact– Trade Can Make Everyone Better off– Markets Are usually a Good Way to Organize Economic Activity– Government Can Sometimes Improve Market Outcomes
• How the Economy as a Whole Works– A Country’s Standard of Living Depends on its Ability to Produce Goods
and Services– Prices Rise When the Government Prints Too Much Money– Society Faces a Short-Run Trade-off between Inflation and Unemployment