This document provides an overview of the 10 principles of economics covered in an introductory macroeconomics course. It discusses how economists study individual decision-making, interactions between people, and forces that affect the overall economy. The principles cover how people make rational decisions based on costs and incentives, how voluntary trade benefits all parties, how markets and governments each have roles in organizing economic activity, how standards of living are determined by productivity, and the relationship between inflation, unemployment, and monetary policy.
This document provides an overview of the 10 principles of economics covered in an introductory macroeconomics course. It discusses how economists study individual decision-making, interactions between people, and forces that affect the overall economy. The principles cover how people make rational decisions based on costs and incentives, how voluntary trade benefits all parties, how markets and governments each have roles in organizing economic activity, how standards of living are determined by productivity, and the relationship between inflation, unemployment, and monetary policy.
This document provides an overview of the 10 principles of economics covered in an introductory macroeconomics course. It discusses how economists study individual decision-making, interactions between people, and forces that affect the overall economy. The principles cover how people make rational decisions based on costs and incentives, how voluntary trade benefits all parties, how markets and governments each have roles in organizing economic activity, how standards of living are determined by productivity, and the relationship between inflation, unemployment, and monetary policy.
This document provides an overview of the 10 principles of economics covered in an introductory macroeconomics course. It discusses how economists study individual decision-making, interactions between people, and forces that affect the overall economy. The principles cover how people make rational decisions based on costs and incentives, how voluntary trade benefits all parties, how markets and governments each have roles in organizing economic activity, how standards of living are determined by productivity, and the relationship between inflation, unemployment, and monetary policy.
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ECN 202
Principles of Macroeconomics Instructor: Nabila Maruf Independent University, Bangladesh Lecture Note: 1 Chapter 1: Ten Principles of Economics Summer 2018
1 Ten Principles of Economics Economists study: How people make decisions How people interact with one another Analyze forces and trends that affect the economy as a whole
2 How People Make Decisions The behavior of an economy reflects the behavior of the individuals who make up the economy
We begin with four principles of individual decision
making
Principle 1 : People Face Trade-Offs
“There ain’t no such thing as a free lunch” Making decisions requires trading off one goal against another 3 How People Make Decisions Students –time
Parents – income
Society Gun and butters (National defense Vs. consumer goods) Clean environment Vs. high level of income
Efficiency Vs. Equality
Efficiency – the property of society the most it can from its scarce
resources Equality – the property of distributing economic prosperity
uniformly among the members of the society
4 How People Make Decisions Principle 2: The Cost of Something is What You Give up to Get It People face trade-offs
Making decisions requires comparing the costs and
benefits of alternatives
Opportunity cost – whatever must be given up to obtain
some item
5 How People Make Decisions Principle 3: Rational People Think at the Margin Rational People People who systematically and purposefully do the best they can to achieve their objectives
Marginal Change A small incremental adjustment to a plan of action
Rational decision maker takes an action – marginal
benefit > marginal cost
6 How People Make Decisions Principle 4: People Respond to Incentives Incentive Something that induces a person to act, such as the prospect of a punishment or reward
Higher Price Buyers consume less Sellers produce more
7 How People Interact The next three principles concern how people interact with one another
Principle 5: Trade Can Make Everyone Better Off
By trading with others, people can buy a greater variety of goods and services at a lower cost
Trade between two countries can make each country
better off
8 How People Interact Principle 6: Markets Are Usually a Good Way to Organize Economic Activity Communist Countries – Centrally planned – Government allocates economy’s resources
Market Economy 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’s Invisible hand
9 How People Interact Principle 7: Government Can Sometimes Improve Market Outcomes Government enforces the rules and maintains the institutions that are key to a market economy
Market economies need institutions to enforce property
rights
Property rights the ability of an individual to own and exercise control over scarce resources 10 How People Interact Market Failure A situation in which a market left on its own fails to allocate resources efficiently
Externality The impact of one person’s actions on the well-being of a bystander
Market Power The ability of a single economic actor to have substantial effect on market prices 11 How the Economy as a Whole Works The last three principles concerns the workings of the economy as a whole
Principle 8: A Country’s Standard of Living
Depends on its Ability to Produce Goods and Services Large differences in living standards Among Countries Over Time
12 How the Economy as a Whole Works Variations in living standards are due to countries’ productivity
Productivity The quantity of goods and services produced from each unit of labor input
Principle 9: Price Rise When the Government Prints
Too Much Money Inflation – An increase in the overall level of prices in the economy 13 How the Economy as a Whole Works Inflation is caused by the growth in the quantity of money
Principle 10: Society Faces a Short-Run Trade-off
between Inflation and Unemployment Increase in the amount of money Overall level of spending and demand for goods and services increases
Higher demand higher price over time but higher
employment 14 How the Economy as a Whole Works More hiring means lower unemployment
Business Cycle Fluctuations in economic activity, such as employment and production
