Introduction Principles of Economic (10 PRINCIPLES OF ECONOMICS (4: People…
Introduction Principles of Economic
10 PRINCIPLES OF ECONOMICS
4: People Respond to Incentives
6: Markets Are Usually a Good Way to Organize Economic Activity
7: Governments Can Sometimes Improve Market Outcomes
3: Rational People Think at the Margin
8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
2: The Cost of Something Is What You Give Up to Get It
9: Prices Rise When the Government Prints Too Much Money
1: People Face Trade-offs
10: Society Faces a Short-run Trade-off between Inflation and Unemployment
5: Trade Can Make Everyone Better Off
Thinking Like an Economist
THE ECONOMIST AS A SCIENTIST
The Scientific Method: Observation, Theory, and More Observation
The Role of Assumptions
1)The Circular-Flow Diagram
2) The Production Possibilities Frontier
THE ECONOMIST AS POLICY ADVISOR
Positive versus Normative Analysis
Positive statements are statements that attempt to describe the world as it is.
-Called descriptive analysis
-An increase in the minimum wage will cause a decrease in employment among the least-skilled
-Higher federal budget deficits will cause interest rates to increase
Normative statements are statements about how the world should be.
-Called prescriptive analysis
-The income gains from a higher minimum wage are worth more than any slight reductions in employment
-Governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor
Interdependence and the Gains from Trade
Remember, economics is the study of how societies produce and distribute goods in an attempt to satisfy the wants and needs of their members.
Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity
-Interdependence occurs because people are better off when they specialize and trade with others
-Patterns of production and trade are based upon differences in opportunity costs
A PARABLE FOR THE MODERN ECONOMY
-Each consumes only what he or she can produce alone.
-The production possibilities frontier is also the consumption possibilities frontier.
-Without trade, economic gains are diminished
Specialization and Trade
Both would be better off if they specialize in producing the product they are more suited to produce, and then trade with each other
-Describes the productivity of one person, firm, or nation compared to that of another.
-The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.
Opportunity Cost and Comparative Advantage
-Compares producers of a good according to their opportunity cost, that is, what must be given up to obtain some item
-The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.
Comparative Advantage and Trade
-Comparative advantage and differences in opportunity costs are the basis for specialized production and trade.
-Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade
Benefits of Trade
Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage.