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File: Economics Pdf 125338 | Econ200lec00
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                  C H A P T E R                                                     In this chapter, 
                               1                                                    In this chapter, 
                                                                                    look for the answers to these questions:
                                                                                    look for the answers to these questions:
                    Ten (Seven Micro-) Principles of 
                    Ten (Seven Micro-) Principles of                                ƒ What kinds of questions does economics address?
                                     Economics
                                     Economics                                      ƒ What are the principles of how people make 
                                P R I N C I P L E S   O F
                                 P R I N C I P L E S   O F                             decisions? 
                         Microeonomics                                              ƒ What are the principles of how people interact?
                                         N. Gregory Mankiw
                                         N. Gregory Mankiw                          ƒ What are the principles of how the economy as a 
                                                                                       whole works? 
                               Premium PowerPoint Slides 
                                    by Ron Cronovich
                          ©2009 South-Western, a part of Cengage Learning, all rights reserved                                              1
                        What Economics Is All About                                      The principles of 
                                                                                         The principles of 
                   ƒ Scarcity:  the limited nature of society’s                           HOW PEOPLE 
                     resources                                                            HOW PEOPLE 
                                                                                      MAKE DECISIONS
                   ƒ Economics:  the study of how society manages                      MAKE DECISIONS
                     its scarce resources, e.g.
                      ƒ how people decide what to buy, 
                       how much to work, save, and spend
                      ƒ how firms decide how much to produce, 
                       how many workers to hire
                      ƒ how society decides how to divide its resources 
                       between national defense, consumer goods, 
                       protecting the environment, and other needs
                  TEN PRINCIPLES OF ECONOMICS                             2
                                                                                                                                                     1
                        HOW PEOPLE MAKE DECISIONS                                          HOW PEOPLE MAKE DECISIONS
                  Principle #1:  People Face Tradeoffs                              Principle #1:  People Face Tradeoffs
                  Principle #1:  People Face Tradeoffs                               Principle #1:  People Face Tradeoffs
                   All decisions involve tradeoffs.  Examples:                       ƒ Society faces an important tradeoff:  
                                                                                                   efficiency vs. equality 
                   ƒ Going to a party the night before your midterm                  ƒ Efficiency:  when society gets the most from its 
                     leaves less time for studying.                                    scarce resources
                   ƒ Having more money to buy stuff requires working                 ƒ Equality:  when prosperity is distributed uniformly 
                     longer hours, which leaves less time for leisure.                 among society’s members
                   ƒ Protecting the environment requires resources                   ƒ Tradeoff:  To achieve greater equality, 
                     that could otherwise be used to produce                           could redistribute income from wealthy to poor.   
                     consumer goods.                                                   But this reduces incentive to work and produce, 
                                                                                       shrinks the size of the economic “pie.”
                  TEN PRINCIPLES OF ECONOMICS                             4         TEN PRINCIPLES OF ECONOMICS                             5
                        HOW PEOPLE MAKE DECISIONS                                          HOW PEOPLE MAKE DECISIONS
                  Principle #2:  The Cost of Something Is                           Principle #2:  The Cost of Something Is 
                  Principle #2:  The Cost of Something Is                            Principle #2:  The Cost of Something Is 
                  What You Give Up to Get It                                        What You Give Up to Get It
                  What You Give Up to Get It                                         What You Give Up to Get It
                   ƒ Making decisions requires comparing the costs                                        Examples:
                     and benefits of alternative choices.                            The opportunity cost of…
                   ƒ The opportunity cost of any item is                              …going to college for a year is not just the tuition, 
                     whatever must be given up to obtain it.                            books, and fees, but also the foregone wages.  
                   ƒ It is the relevant cost for decision making.                     …seeing a movie is not just the price of the ticket, 
                                                                                        but the value of the time you spend in the theater.  
                  TEN PRINCIPLES OF ECONOMICS                             6         TEN PRINCIPLES OF ECONOMICS                             7
                                                                                                                                                     2
                        HOW PEOPLE MAKE DECISIONS                                         HOW PEOPLE MAKE DECISIONS
                  Principle #3:  Rational People Think at the                      Principle #3:  Rational People Think at the 
                  Principle #3:  Rational People Think at the                       Principle #3:  Rational People Think at the 
                  Margin                                                           Margin
                  Margin                                                            Margin
                   Rational people                                                  Examples:
                    ƒ systematically and purposefully do the best they              ƒ When a student considers whether to go to 
                      can to achieve their objectives.                                 college for an additional year, he compares the 
                    ƒ make decisions by evaluating costs and benefits                  fees & foregone wages to the extra income 
                      of marginal changes – incremental adjustments                    he could earn with the extra year of education.
                      to an existing plan.                                          ƒ When a manager considers whether to increase 
                                                                                       output, she compares the cost of the needed 
                                                                                       labor and materials to the extra revenue.  
                  TEN PRINCIPLES OF ECONOMICS                            8         TEN PRINCIPLES OF ECONOMICS                            9
                        HOW PEOPLE MAKE DECISIONS                                    A C T I V E  L E A R N I N G  1
                                                                                     A C T I V E  L E A R N I N G  
                                                                                                               1
                                                                                     Applying the principles
                  Principle #4:  People Respond to Incentives                        Applying the principles
                  Principle #4:  People Respond to Incentives
                   ƒ Incentive: something that induces a person to                   You are selling your 1996 Mustang.  You have 
                     act, i.e. the prospect of a reward or punishment.               already spent $1000 on repairs.  
                   ƒ Rational people respond to incentives.                          At the last minute, the transmission dies.  You can 
                     Examples:                                                       pay $600 to have it repaired, or sell the car “as is.”
                      ƒ When gas prices rise, consumers buy more                     In each of the following scenarios, should you 
                        hybrid cars and fewer gas guzzling SUVs.                     have the transmission repaired?  Explain.
                      ƒ When cigarette taxes increase,                                 A. Blue book value is $6500 if transmission works, 
                        teen smoking falls.                                                $5700 if it doesn’t
                                                                                       B. Blue book value is $6000 if transmission works, 
                                                                                           $5500 if it doesn’t
                  TEN PRINCIPLES OF ECONOMICS                           10                                                                11
                                                                                                                                                   3
                    A C T I V E  L E A R N I N G  1                                   A C T I V E  L E A R N I N G  1
                    A C T I V E  L E A R N I N G                                       A C T I V E  L E A R N I N G  
                                              1                                                                  1
                    Answers                                                           Answers
                    Answers                                                            Answers
                    Cost of fixing transmission = $600                                Observations:
                    A. Blue book value is $6500 if transmission works,                ƒ The $1000 you previously spent on repairs is 
                       $5700 if it doesn’t                                               irrelevant.  What matters is the cost and benefit 
                       Benefit of fixing the transmission = $800                         of the marginal repair (the transmission). 
                       ($6500 – 5700).                                                ƒ The change in incentives from scenario A 
                       It’s worthwhile to have the transmission fixed.                   to scenario B caused your decision to change.  
                    B. Blue book value is $6000 if transmission works, 
                       $5500 if it doesn’t
                       Benefit of fixing the transmission is only $500.
                       Paying $600 to fix transmission is not worthwhile.
                                                                         12                                                                13
                     The principles of                                                          HOW PEOPLE INTERACT
                     The principles of                                              Principle #5:  Trade Can Make Everyone 
                      HOW PEOPLE                                                     Principle #5:  Trade Can Make Everyone 
                      HOW PEOPLE                                                    Better Off
                        INTERACT                                                     Better Off
                        INTERACT                                                     ƒ Rather than being self-sufficient, 
                                                                                       people can specialize in producing one good or 
                                                                                       service and exchange it for other goods.  
                                                                                     ƒ Countries also benefit from trade & specialization:
                                                                                        ƒ Get a better price abroad for goods they produce
                                                                                        ƒ Buy other goods more cheaply from abroad than 
                                                                                          could be produced at home
                                                                                    TEN PRINCIPLES OF ECONOMICS                            15
                                                                                                                                                     4
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...C h a p t e r in this chapter look for the answers to these questions ten seven micro principles of what kinds does economics address are how people make i n l s o f decisions microeonomics interact gregory mankiw economy as whole works premium powerpoint slides by ron cronovich south western part cengage learning all rights reserved is about scarcity limited nature society resources study manages its scarce g decide buy much work save and spend firms produce many workers hire decides divide between national defense consumer goods protecting environment other needs principle face tradeoffs involve examples faces an important tradeoff efficiency vs equality going party night before your midterm when gets most from leaves less time studying having more money stuff requires working prosperity distributed uniformly longer hours which leisure among members achieve greater that could otherwise be used redistribute income wealthy poor but reduces incentive shrinks size economic pie cost somet...

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