10 Principles of Economics
10 Principles of Economics
10 Principles of Economics
Principles
of Economics
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Introduction to Course
Goals
Fundamental concepts of Economics
Simple Models and Equilibria
Way of Thinking Like Economists
Evaluation
Midterm 35
Homeworks 15
Final 50
References
Mankiw, N.G. (2019). Principles of Economics (9. Baskı). CENGAGE
Learning Custom Publishing
Ertek, T. (2020). Makroekonomiye Giriş – Basından Örneklerle (4.
Baskı). BETA Basım Yayım
Ertek, T. (2017). Mikroekonomiye Giriş – Basından Örneklerle (6.
Baskı). BETA Basım Yayım
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Seventh Edition
Principles of
Economics
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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What Economics Is All About
• Scarcity: the limited nature of society’s
resources
• Economics: the study of how society manages
its scarce resources, e.g.
– how people decide what to buy,
how much to work, save, and spend
– how firms decide how much to produce,
how many workers to hire
– how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
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The principles of
HOW PEOPLE
MAKE DECISIONS
©lithian/Shutterstock.com
PRINCIPLE 1
People Face Tradeoffs
All decisions involve tradeoffs. Examples:
Going to a cinema the night before your midterm
leaves less time for studying.
Having more money to buy stuff requires
working longer hours, which leaves less time
for leisure.
Protecting the environment requires resources
that could otherwise be used to produce
consumer goods.
Microeconomics = Behaviour
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PRINCIPLE 1
People Face Tradeoffs
Society faces an important tradeoff:
efficiency vs. equality
Efficiency: when society gets the most from its scarce
resources
Equality: when prosperity is distributed uniformly
among society’s members
Tradeoff: To achieve greater equality,
could redistribute income from wealthy to poor.
But this reduces incentive to work and produce, shrinks
the size of the economic “pie.”
Examples: Welfare distribution, unemployment
insurance
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PRINCIPLE 2
The Cost of Something Is
What You Give Up to Get It
Making decisions requires comparing the costs
and benefits of alternative choices.
The opportunity cost of any item is
whatever must be given up to obtain it.
It is the relevant cost for decision making.
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PRINCIPLE 2
The Cost of Something Is
What You Give Up to Get It
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.
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PRINCIPLE 3
Rational People Think at the Margin
Rational people
systematically and purposefully do the best they
can to achieve their objectives.
make decisions by evaluating costs and benefits
of marginal changes, incremental adjustments
to an existing plan.
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PRINCIPLE 3
Rational People Think at the Margin
Two important concepts
-Rationality
-Marginal change (cost, benefit)
Examples:
When a student considers whether to go to college for
an additional year, he compares the fees & foregone
wages to the extra income
he could earn with the extra year of education.
When a manager considers whether to increase
output, she compares the cost of the needed labor
and materials to the extra revenue.
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PRINCIPLE 4
People Respond to Incentives
Incentive: something that induces a person to
act, i.e. the prospect of a reward or punishment.
Rational people respond to incentives.
Examples:
Policymakers should consider incentives
When gas prices rise, consumers buy more hybrid
cars and fewer gas guzzling SUVs.
– It may reduce personal cars in traffic.
When cigarette taxes increase,
teen smoking falls.
Belt law in U.S.
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PRINCIPLE 5
Trade Can Make Everyone Better Off
Rather than being self-sufficient,
people can specialize in producing one good or
service and exchange it for other goods.
Countries also benefit from trade and
specialization:
Get a better price abroad for goods they
produce
Buy other goods more cheaply from abroad
than could be produced at home
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PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
Market: a group of buyers and sellers
(need not be in a single location)
“Organize economic activity” means determining
what goods to produce
how to produce them
how much of each to produce
who gets them
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PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
A market economy allocates resources through the
decentralized decisions of many households and firms as they
interact in markets.
How could self decentralized decision making and self-interested
decision makers lead to market economy?
Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being
Prices decided by consumers and firms.
Government should avoid intervention
Tax
Price
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PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
The invisible hand works through the price
system:
The interaction of buyers and sellers
determines prices.
Each price reflects the good’s value to buyers
and the cost of producing the good.
Prices guide self-interested households and
firms to make decisions that, in many cases,
maximize society’s economic well-being.
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PRINCIPLE 7
Governments Can Sometimes
Improve Market Outcomes
What is the role of the government?
Important role for govt: enforce property rights
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PRINCIPLE 7
Governments Can Sometimes
Improve Market Outcomes
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PRINCIPLE 7
Governments Can Sometimes
Improve Market Outcomes
Govt may alter market outcome to
promote equity.
If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can
change how the economic “pie” is divided.
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The principles of
HOW THE
ECONOMY
AS A WHOLE
WORKS
©nopporn/Shutterstock.com
PRINCIPLE 8
A Country’s Standard of Living Depends on Its
Ability to Produce Goods & Services
Huge variation in living standards across
countries and over time:
Average income in rich countries is more than
ten times average income in poor countries.
The U.S. standard of living today is about
eight times larger than 100 years ago.
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PRINCIPLE 8
A Country’s Standard of Living Depends on Its
Ability to Produce Goods & Services
The most important determinant of living
standards: productivity, the amount of goods
and services produced per unit of labor.
Productivity depends on the equipment, skills,
and technology available to workers.
Other factors (e.g., labor unions, competition from
abroad) have far less impact on living standards.
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PRINCIPLE 9
Prices Rise When the Government Prints
Too Much Money
Inflation: increases in the general level of prices.
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PRINCIPLE 10
Society Faces a Short-run Tradeoff Between
Inflation and Unemployment
In the short-run (1–2 years),
many economic policies push inflation and
unemployment in opposite directions.
Other factors can make this tradeoff more or less
favorable, but the tradeoff is always present.
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Summary
The principles of decision making are:
• People face tradeoffs.
• The cost of any action is measured in terms of
foregone opportunities.
• Rational people make decisions by comparing
marginal costs and marginal benefits.
• People respond to incentives.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Summary
The principles of interactions among people are:
• Trade can be mutually beneficial.
• Markets are usually a good way of coordinating
trade.
• Govt can potentially improve market outcomes if
there is a market failure or if the market outcome
is inequitable.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Summary
The principles of the economy as a whole are:
• Productivity is the ultimate source of living
standards.
• Money growth is the ultimate source of inflation.
• Society faces a short-run tradeoff between
inflation and unemployment.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.