1. Principles of Macroeconomics
PowerPoint Presentations for
Principles of Macroeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa

2. TEN PRINCIPLES OF ECONOMICS
Chapter 1
Copyright © 2014 by Nelson Education Ltd.

3. TEN PRINCIPLES OF ECONOMICS
The word economy comes from the Greek word for
“one who manages a household.”
Copyright © 2014 by Nelson Education Ltd.

4. TEN PRINCIPLES OF ECONOMICS
The management of society’s resources (e.g., people, land, buildings, machinery) is important because resources are scarce.
Scarcity: the limited nature of society’s resources
Copyright © 2014 by Nelson Education Ltd.

5. TEN PRINCIPLES OF ECONOMICS
Economics: the study of how society manages its scarce resources
Copyright © 2014 by Nelson Education Ltd.

6. HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
“There is no such thing as a free lunch.”
Efficiency: the property of society getting the most it can from its scarce resources
Equity: the property of distributing economic prosperity fairly among the members of society
Copyright © 2014 by Nelson Education Ltd.

7. HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is What You Give Up to Get It
Opportunity cost: whatever must be given up to obtain some item
Copyright © 2014 by Nelson Education Ltd.

8. 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 changes: small incremental adjustments to a plan of action
Copyright © 2014 by Nelson Education Ltd.

9. HOW PEOPLE MAKE DECISIONS
Principle #4: People Respond to Incentives
Incentive: something that induces a person to act
Mark Zuckerberg understood incentives.
Copyright © 2014 by Nelson Education Ltd.

10. Copyright © 2014 by Nelson Education Ltd.
Active Learning Discussion Questions
You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired or sell the car “as is.”
In each of the following scenarios, should you have the transmission repaired? Explain.
A. Blue Book value is $6500 if the transmission works and $5700 if it doesn’t,
B. Blue Book value is $6000 if the transmission works, $5500 if it doesn’t.
Copyright © 2014 by Nelson Education Ltd.

11. Copyright © 2014 by Nelson Education Ltd.
Active Learning Answers
Cost of fixing transmission = $600
A. Blue Book value is $6500 if the transmission works, $5700 if it doesn’t.
Benefit of fixing the transmission = $800 ($6500 – $5700).
It’s worthwhile to have the transmission fixed.
Blue Book value is $6000 if the transmission works, $5500 if it doesn’t.
Benefit of fixing the transmission is only $500
Paying $600 to fix the transmission is not worthwhile.
Copyright © 2014 by Nelson Education Ltd.

12. Copyright © 2014 by Nelson Education Ltd.
Active Learning Answers
Observations:
The $1000 you previously spent on repairs is irrelevant. What matters is the cost and benefit of the marginal repair (the transmission).
The change in incentives from scenario A to scenario B caused your decision to change.
Copyright © 2014 by Nelson Education Ltd.

13. Copyright © 2014 by Nelson Education Ltd.
QuickQuiz
Describe an important tradeoff you recently faced.
Give an example of some action that has both a monetary and nonmonetary opportunity cost.
Describe an incentive your parents offered to you in an effort to influence your behaviour.
Copyright © 2014 by Nelson Education Ltd.

14. Principle #5: Trade Can Make Everyone Better Off
HOW PEOPLE INTERACT
Principle #5: Trade Can Make Everyone Better Off
Property rights: the ability of an individual to own and exercise control over scarce resources
Copyright © 2014 by Nelson Education Ltd.

15. Copyright © 2014 by Nelson Education Ltd.
HOW PEOPLE INTERACT
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity
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
Goran Bogicevic/Shutterstock
Copyright © 2014 by Nelson Education Ltd.

16. Copyright © 2014 by Nelson Education Ltd.
HOW PEOPLE INTERACT
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity (continued)
In his 1776 book, Adam Smith observed that households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes.
© Bettmann/Corbis
Copyright © 2014 by Nelson Education Ltd.

17. Principle #7: Governments Can Sometimes Improve Market Outcomes
HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes Improve Market Outcomes
We need governments for two reasons:
To enforce property rights
Property rights: the ability of an individual to own and exercise control over scarce resources
Copyright © 2014 by Nelson Education Ltd.

18. Copyright © 2014 by Nelson Education Ltd.
HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes Improve Market Outcomes (continued)
Because the invisible hand is powerful, but it is not omnipotent
There are two broad reasons for a government to intervene in the economy:
The goal of efficiency
The goal of equity
Copyright © 2014 by Nelson Education Ltd.

19. Copyright © 2014 by Nelson Education Ltd.
Active Learning Discussion Questions
For each of the following situations, what is the government’s role? Does the government’s intervention improve the outcome?
Public schools for K-12
Workplace safety regulations
Public highways
Patent laws, which allow drug companies to charge high prices for life-saving drugs
Copyright © 2014 by Nelson Education Ltd.

20. Copyright © 2014 by Nelson Education Ltd.
HOW PEOPLE INTERACT
The goal of efficiency
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
The goal of equity
Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being.
Copyright © 2014 by Nelson Education Ltd.

21. QuickQuiz
Why is a country better off not isolating itself from all other countries?
Why do we have markets and, according to economists, what roles should government play in them?

22. HOW THE ECONOMY AS A WHOLE WORKS
Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Productivity: the quantity of goods and services produced from each hour of a worker’s time
Copyright © 2014 by Nelson Education Ltd.

23. HOW THE ECONOMY AS A WHOLE WORKS
Principle #9: Prices Rise When the Government Prints Too Much Money
Inflation: an increase in the overall level of prices in the economy
What causes inflation?
Thinkstock
Copyright © 2014 by Nelson Education Ltd.

24. HOW THE ECONOMY AS A WHOLE WORKS
Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment
This short-run tradeoff plays a key role in the analysis of the business cycle.
Business cycle: the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed
Copyright © 2014 by Nelson Education Ltd.

25. Copyright © 2014 by Nelson Education Ltd.

26. QuickQuiz
List and briefly explain the three principles that describe how the economy as a whole works.

27. TABLE 1.1: Ten Principles of Economics
Copyright © 2014 by Nelson Education Ltd.

28. Classroom Activity Getting Dressed in the Global Economy
1. Where did your clothes come from?
2. Who worked to produce your clothes?
3. What things do you consider when buying a garment?
4. Where were your clothes produced (what countries)?
Copyright © 2014 by Nelson Education Ltd.

29. Copyright © 2014 by Nelson Education Ltd.
The end
Chapter 1
Copyright © 2014 by Nelson Education Ltd.