Lecture 1 introduction

PRINCIPLES OF Economics By N Gregory Mankiw Principles of Economics 5e N Gregory Mankiw © 2009 Cengage Chapter LECTURE INTRODUCTION Chapter Some ground rules so that we can all get along All cellphones are in silent mode Attendance check is compulsory No switching between tutorial classes When writing emails, please be polite Problems with grades are handled within days after annoucement Chapter The basic concept of Economics Ten principles of Economics Economist as a scientist Economist as an advisor Chapter Ten Principles of Economics Ten Principles of Economics • Economy – “oikonomos” (Greek) – “One who manages a household” • Household - many decisions – Allocate scarce resources • Ability, effort, and desire • Society - many decisions – Allocate resources – Allocate output • Resources are scarce Ten Principles of Economics • Scarcity - limited nature of society’s resources • Economics – Study of how society manages its scarce resources • Economists study: – How people make decisions – How people interact with one another – Analyze forces and trends that affect the economy as a whole How People Make Decisions Principle 1: People face trade-offs • Making decisions – Trade off one goal against another – Student – time – Parents – income – Society • National defense vs consumer goods • Clean environment vs high level of income • Efficiency vs equality How People Make Decisions Principle 1: People face trade-offs • Efficiency – Society - maximum benefits from its scarce resources – Size of the economic pie • Equality – Benefits - uniformly distributed among society’s members – How the pie is divided into individual slices 10 The circular flow 38 The Economist as a Scientist Our second model: The production possibilities frontier • Production possibilities frontier – A graph – Combinations of output that the economy can possibly produce – Given the available • Factors of production • Production technology 39 The production possibilities frontier Quantity of Computers Produced C F 3,000 A 2,200 2,000 B Production Possibilities Frontier D 1,000 E 300 600 700 The production possibilities frontier shows the combinations of output - in this case, cars and computers - that the economy can possibly produce The economy can produce any combination on or inside the frontier Points outside the frontier are not feasible given the economy’s resources 1,000 Quantity of Cars Produced 40 He can either write songs or record his own songs, which one is more profitable? 41 The Economist as a Scientist • Efficient levels of production – Economy’s getting all it can • From the scarce resources available – Points on the production possibilities frontier – Trade-off: • The only way to get more of one good is to get less of the other good • Inefficient levels of production – Points inside production possibilities frontier 42 The Economist as a Scientist • Opportunity cost of one good – Give up the other good • Bowed out production possibilities frontier – Opportunity cost of a car – highest • Economy - producing many cars and fewer computers – Opportunity cost of a car – lower • Economy - producing fewer cars and many computers – Resource specialization 43 The Economist as a Scientist • Technological advance – Outward shift of the production possibilities frontier – Economic growth – Produce more of both goods 44 A shift in the production possibilities frontier Quantity of Computers Produced 4,000 3,000 G 2,300 2,200 A 600 650 A technological advance in the computer industry enables the economy to produce more computers for any given number of cars As a result, the production possibilities frontier shifts outward If the economy moves from point A to point G, then the production of both cars and computers increases 1,000 Quantity of Cars Produced 45 The Economist as a Scientist Microeconomics and Macroeconomics • Microeconomics – The study of how households and firms make decisions – And how they interact in markets • Macroeconomics – The study of economy-wide phenomena, including inflation, unemployment, and economic growth 46 The Economist as a Policy Advisor Positive vs Normative analysis • Positive statements – Attempt to describe the world as it is – Descriptive – Confirm or refute by examining evidence • Normative statements – Attempt to prescribe how the world should be – Prescriptive 47 The Economist as a Policy Advisor (Self-study) Economists in Washington – Council of Economic Advisers • Advise the president of the United states • Write the annual Economic Report of the President – Department of Treasury – Department of Labor – Department of Justice – Congressional Budget Office – The Federal Reserve 48 The Economist as a Policy Advisor (Self-study) Why economists’ advice is not always followed • President – Economic advisors - Economic policy – Communication advisors – Press advisors – Legislative affairs advisors – Political advisors 49 Why Economists Disagree • Economists - may disagree – Validity of alternative positive theories about how the world works • Economists - may have different values – Different normative views about what policy should try to accomplish 50 Why Economists Disagree Perception vs Reality • Rent control - adversely affects availability and quality of housing – Costly way of helping the neediest members of society – Many cities use rent control • Trade barriers – economist oppose it – Import on certain goods - restricted 51 Table Ten principles of economics How People Make Decisions 1: People Face Trade-offs 2: The Cost of Something Is What You Give Up to Get It 3: Rational People Think at the Margin 4: People Respond to Incentives How People Interact 5: Trade Can Make Everyone Better Off 6: Markets Are Usually a Good Way to Organize Economic Activity 7: Governments Can Sometimes Improve Market Outcomes How the Economy as a Whole Works 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services 9: Prices Rise When the Government Prints Too Much Money 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment 52 ... Opportunity cost • Whatever most be given up to obtain one item 13 If a girl receives 10 proposals from 10 different guys and she ends up marrying 1, what is her opportunity cost? How People Make Decisions...Chapter LECTURE INTRODUCTION Chapter Some ground rules so that we can all get along All cellphones are in silent... feasible given the economy’s resources 1, 000 Quantity of Cars Produced 40 He can either write songs or record his own songs, which one is more profitable? 41 The Economist as a Scientist • Efficient