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Principles of Economics


PRINCIPLES OF ECONOMICS Lecturer: Jack Wu Economics 101 – PowerPoint PPT presentation

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Title: Principles of Economics

Principles of Economics
  • Lecturer Jack Wu
  • Economics 101

Why Do We Have to Learn Economics?
  • ltFactgt. Economics is a subject that we must
    confront in our everyday lives. As a matter of
    fact, we already spend a great deal of our time
    thinking about economic issues prices, buying
    decisions, use of our time, and so on.

Economy and Economics
  • The word economy comes from a Greek word for one
    who manages a household.
  • Fundamental economic problem scarce resources.
  • -- Scarcity. . . means that society has
    limited resources and therefore cannot produce
    all the goods and services people wish to have.
  • Economics is the study of how society manages its
    scarce resources.

Microeconomics ??(??)???
  • Microeconomics the study of how households and
    firms make decisions and how they interact in
    markets (Econ 101 introductory Microeconomics,
    Econ 201 intermediate Microeconomics)

Macroeconomics ??(??)???
  • Macroeconomics the study of economy-wide
    phenomena including inflation, unemployment, and
    economic growth (Econ 102 Introductory
    Macroeconomics, Econ 202 Intermediate

Micro and Macro effects
  • An increase in gasoline price
  • _ Micro effect vehicle driver, bicycle market,
  • _Macro effect inflation, unemployment

Ten Principles of Economics
  • How people make decisions. (4 principles)
  • How people interact with each other. (3
  • The forces and trends that affect how the
    economy as a whole works. (3 principles)

  • How People Make Decisions

Principle 1 People Face Tradeoffs.
  • There is no such thing as a free lunch.
  • To get one thing, we usually have to give up
    another thing.
  • Making decisions requires trading off one goal
    against another.

Examples of Trade Off
  • How a student spends her time
  • How a family decides to spend its income
  • How the Taiwanese government spends tax dollars
  • How regulations may protect the environment at a
    cost to firm owners

Special Example of Tradeoff
  • Efficiency v. Equity
  • Efficiency means society gets the most that it
    can from its scarce resources.
  • Equity means the benefits of those resources are
    distributed fairly among the members of society.
  • Example Tax paid by wealthy Taiwanese and then
    distributed to those less fortunate.
  • Outcome Increased equity and reduced efficiency

Principle 2 The Cost of Something is What You
Give Up to Get It.
  • Decisions require comparing costs and benefits of
  • Whether to go to college or to work?
  • The opportunity cost of an item is what you give
    up to obtain that item.

Quick Quiz
  • What are the costs of going to college?
  • _ Tuition costs?
  • _ Room and board?
  • _ Forgone pay?

Quick Quiz
  • What is the opportunity cost of seeing a movie?
  • _ cost of admission?
  • _ time cost of going to the theater?
  • _ time cost of attending the show?
  • Note Time cost depends on what else you might do
    with that time. Examples staying at home and
    watch TV, working an extra three hours at paid

Principle 3 Rational People Think at the Margin
  • Many decisions in life involve incremental
    decisions should I take another course this
  • Marginal changes are small, incremental
    adjustments to an existing plan of action.
  • People make decisions by comparing costs and
    benefits at the margin.

Principle 4 People Responds to Incentives
  • Because people make decisions by weighing costs
    and benefits, their decisions may change in
    response to changes in costs and benefits.
  • Example Seat Belt Laws increase use of seat
    belts and lower the incentives of individuals to
    drive safely.

  • How People Interact

Principle 5 Trade can Make Everyone Better Off
  • People gain from their ability to trade with one
  • Competition results in gains from trading.
  • Trade allows people to specialize in what they do
  • Examples Most families do not build their own
    homes, make their own clothes, or grow their own

Principle 6 Markets Are Usually a Good Way to
Organize Economic Activity
  • A market economy is an economy that allocates
    resources through the decentralized decisions of
    many firms and households as they interact in
    markets for goods and services.
  • Adam Smith made the observation that households
    and firms interacting in markets act as if guided
    by an invisible handMarket Prices.

Principle 7 Government Can Sometimes Improve
Market Outcomes
  • Market failure occurs when the market fails to
    allocate resources efficiently.
  • Market failure may be caused by
  • an externality, which is the impact of one person
    or firms actions on the well-being of a
  • market power, which is the ability of a single
    person or firm to unduly influence market prices.
  • When the market fails (breaks down) government
    can intervene to promote efficiency and equity.

  • How the Economy as a Whole Works

Principle 8 The Standard of Living Depends on a
Countrys Production
  • Standard of living may be measured in different
  • By comparing personal incomes.
  • By comparing the total market value of a nations
    production (GDP, Gross Domestic Product).
  • Almost all variations in living standards are
    explained by differences in countries
  • Productivity is the amount of goods and services
    produced from each hour of a workers time.

Principle 9Prices Rise When the Government
Prints Too Much Money
  • Inflation is an increase in the overall level of
    prices in the economy.
  • One cause of inflation is the growth in the
    quantity of money.
  • When the government creates large quantities of
    money, the value of the money falls.

Principle 10 Society Faces a Short-Run Tradeoff
Between Inflation and Unemployment
  • The Phillips Curve illustrates the tradeoff
    between inflation and unemployment
  • Inflation is lower ð Unemployment is higher
  • Its a short-run tradeoff!