1. Principles of Economics
Mr. Barnett
University High School
AP Economics

2. Back to the definition…
Economics is the study of how society manages its scarce resources
In most cases, it is a study of how people make decisions

3. Digging Deeper…Economic Assumptions
Economics assumes people are rational
Economics assumes people almost always act in their own self-interest
Thus, economics is a social science…a study of how people act in their own self-interest

4. The Three Amigos Economic Questions
What products do we produce?
Trade-offs
How do we produce the products?
Alternative means of production
Who consumes the products?
How to distribute society’s products

5. Two Different Kinds of Products
Goods
Something tangible that satisfies people’s wants and desires
Services
Something intangible that satisfies people’s wants and desires

6. Two Different Kinds of Products

7. Two Different Kinds of Products
Types of Goods
Consumption goods – Provide immediate satisfaction of wants
Food, Gasoline, Clothing
Intermediate goods – Part of final product or used up in production process
Wood used for desk, rubber for bottom of shoe
Capital goods – Manufactured factor of production that is used to produce other things
Physical - Tractors, factories, hammer, machinery, printing press
Human – Result of training and/or education

8. Ten Principles of Economics
Numero uno: People face trade-offs
Usually have to sacrifice one thing for another
Example: Money used for buying bubble gum could have been saved for a video game
Example: Time spent working a summer job could have been used to study palm reading
Important trade-off for society is between efficiency and equality
Efficiency – maximizing utility from scarce resources
Equality – distributing economic welfare amongst society

9. Ten Principles of Economics
Numero dos: Cost of something is what you give up to get it
Cost of attending Stanford?
Tuition = $40,050
On Campus Room & Board = $12,291
Books = $1,500
Fees = $1,514
Misc costs (Plane tickets, etc) = ?
Total = $55,355
Going to a school where your mascot is a color and your represented by a goofy tree = PRICELESS
Sacrificed Job = $15,080
Opportunity Costs – Whatever must be sacrificed to obtain some item

10. Ten Principles of Economics
Numero tres: Rational people think at the margin
At the margin means at the ‘edge’ – Small, one unit change in value
Marginal cost - cost of one additional unit of something
Marginal benefit – benefit of one additional unit of something

11. Ten Principles of Economics
Numero quatro: People respond to incentives
An incentive is something that induces a person to act
Can be positive (reward) or negative (punishment)
Examples?
Governments often use incentives to induce change…some might argue economic incentives are the only way to provoke change

14. Ten Principles of Economics
Numero cinco: Trade makes everyone better off
Trade allows people/countries to specialize in something they do best
Trade allows people/countries to acquire a greater diversity of goods/services

15. Ten Principles of Economics
Numero seis: Markets are usually a good way to organize economic activity
Market Economy: An economy that allocates resources through markets via the decentralized decisions of firms and households
Replaced centrally planned economies around the world
Advantages of Market economy?
Adam Smith (1776 Wealth of Nations)– Invisible Hand
In centrally planned economies no self-regulation
In market economies, the ‘invisible hand’ guides the market in deciding what to produce, how much and who gets goods & services

16. Pencil

17. Ten Principles of Economics
Numero siete: Governments can sometimes improve market outcomes
An economy needs a government to:
Protect private property…ensure some semblance of stability
To promote efficiency
To promote equality

18. The Purge

21. Ten Principles of Economics
Numero siete cont: Governments can sometimes improve market outcomes
The free market sometimes fails to promote efficiency or equality
Market Failure: When a market left on its own fails to allocate resources efficiently
Sometimes due to externalities – impact of one person’s actions on the well-being of a bystander
Prices in the market do not reflect the full costs or benefits of consuming a good or service
Negative
Positive

25. Ten Principles of Economics
Numero ocho: A country’s standard of living depends on its ability to produce goods and services
Numero nueve: Prices rise when the government prints too much money
Numero diez: Society faces a short-run trade-off between inflation and unemployment

26. Thinking like an Economist
Micro vs Macro
Micro – small; what individuals/firms consider when making decisions
Macro – study of aggregate decisions
Policies
Overall gov’t spending
Conditions of economic growth

27. Thinking like an Economist
Positive Economic Statement
Descriptive
Deals with cause and effect relationships
Can be tested (not necessarily right)
Normative Economic Statements
Prescriptive
Involve value judgments
Cannot be empirically tested

28. Thinking like an Economist
I’m positive, I’m positive.

29. Economics a science?

30. Adam Smith