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Chapter 1 10 Principles of Economics zEconomics zResources zMaking Decisions yTradeoffs/Opportunity Costs yMarginal Thinking yIncentives.

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Presentation on theme: "Chapter 1 10 Principles of Economics zEconomics zResources zMaking Decisions yTradeoffs/Opportunity Costs yMarginal Thinking yIncentives."— Presentation transcript:

1 Chapter 1 10 Principles of Economics zEconomics zResources zMaking Decisions yTradeoffs/Opportunity Costs yMarginal Thinking yIncentives

2 Chapter 1 10 Principles of Economics yInteracting xThe Benefits of Trade xGovernment Activity yThe Economy As a Whole xStandards of Living/Productivity xWhy Inflation Occurs xThe Inflation/Unemployment Tradeoff

3 Economics z“Economy” comes from a Greek work for “one who manages a household” zEconomics is the study of how society manages its scarce resources yHow we use scarce resources to satisfy unlimited wants

4 Economics zScarcity is the basic economic problem yScarcity means our wants exceed our ability to satisfy them yScarcity arises because of limited resources

5 Resources zResources are used to produce goods and services zResources are land, labor, capital, entrepreneurial ability

6 Resources yLand is all natural resources used in the production process. Owners of land receive rent yLabor is the physical and intellectual services of people. Owners of labor receive wages. yCapital is the human creations used in the production process. Owners of capital receive interest. xNote: we are talking about physical, not financial capital. yEntrepreneurial ability deals with the willingness to take risk. Profit is the reward.

7 Economics zThere are basic questions any economy must answer yWhat to produce yHow to produce what we want yWho should get what is produced

8 Economics zEvery economy answers these questions in their own way yTradition yMarkets yCommand

9 Economics zMarkets are usually a good way to organize economic activity yMost countries today rely on markets to organize economic activity xA market economy is one that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

10 Making Decisions zPeople face tradeoffs yScarcity forces us to make choices yThe tradeoff between equity and efficiency is an example of one such tradeoff xEfficiency deals with society getting the most from its resources xEquity deals with distributing economic prosperity “fairly” among the members of society

11 Making Decisions yWhen you make a decision, you give up something xOpportunity cost is involved xOpportunity cost is the best alternative given up when making a choice or a decision

12 Making Decisions zRational people think at the margin yMaking decisions requires making small, incremental adjustments to a plan of action xThese adjustments are called marginal changes

13 Making Decisions yPeople respond to incentives xBehavior (decision-making) will change in a predictable way when costs and benefits change

14 Interacting zTrade can make everyone better off yTrade is not a zero-sum game yTrade allows for individuals, states, & nations to specialize in what they do best yWith trade, there is a wider variety of goods and services available

15 Interacting zGovernments can sometimes improve market outcomes yGovernments can correct for market failures that occur xThis means the market does not allocate resources efficiently Externalities and market power are examples of market failure yGovernments can promote a more equitable outcome

16 The Economy as a Whole zA country’s standard of living depends on its ability to produce goods and services yThere are large differences in living standards across countries and across time yDifferences in productivity explain this xProductivity is the quantity of goods and services that can be produced from each hour of a worker’s time

17 The Economy as a Whole zPrices rise when the government prints too much money yIn most cases, large or persistent inflation is the result of excessive growth in the money supply xInflation is an increase in the overall level of prices in an economy

18 The Economy as a Whole zSociety faces a short-run tradeoff between inflation and unemployment yIn the short run, if prices fall, unemployment will increase yThe Phillips curve describes this short-run trade off between inflation and unemployment yThe temporary tradeoff occurs because some prices are sticky in the short run


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