1. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economics Economics is the study of how society manages its scarce resources.

2. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economists study... u How people make decisions. u How people interact with each other. u The forces and trends that affect the economy as a whole.

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Ten Principles of Economics ¶People face tradeoffs. ·The cost of something is what you give up to get it. ¸Rational people think at the margin. ¹People respond to incentives. How People Make Decisions

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Ten Principles of Economics ºTrade can make everyone better off. »Markets are usually a good way to organize economic activity. ¼Governments can sometimes improve economic outcomes. How People Interact

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 8. The standard of living depends on a country’s production.

6. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. People face tradeoffs. “There is no such thing as a free lunch!”

7. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. People face tradeoffs. To get one thing, we usually have to give up another thing. u Guns v. butter u Food v. clothing u Leisure time v. work u Efficiency v. equity Making decisions requires trading off one goal against another.

8. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The cost of something is what you give up to get it. The opportunity cost of an item is what you give up to obtain that item.

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Rational people think at the margin. Marginal changes are small, incremental adjustments to an existing plan of action. People make decisions by comparing costs and benefits at the margin.

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. People respond to incentives. Here’s what Adam Smith said: u It is not from the benevolence of the butcher, the brewer, and the baker that we expect our dinner, but from their regard to their own self interest.

11. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets are usually a good way to organize economic activity. Adam Smith observed that households and firms interacting in markets act as if they are guided by an “invisible hand.”

12. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Here’s how Adam Smith put it: n …every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…He intends only his own gain, and he is … led by an invisible hand to promote an end which was no part of his intention.

13. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets are usually a good way to organize economic activity. u Households and firms look at prices when they decide what to buy and sell. They thus take account of the social costs of their actions. u Prices [usually] guide individuals to do things that maximize the welfare of society as a whole.

14. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Governments can sometimes improve market outcomes. When the market fails (breaks down) government can intervene to promote efficiency and equity.

15. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The standard of living depends on a country’s production. Productivity is the amount of goods and services produced from each hour of a worker’s time. Higher productivity  Higher standard of living

16. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Here’s what Adam Smith said: n The division of labor is limited by the extent of the market.

17. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u When individuals make decisions, they face tradeoffs. u Rational people make decisions by comparing marginal costs and marginal benefits.

18. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u People can benefit by trading with each other. u Markets are usually a good way of coordinating trades. u Government can potentially improve market outcomes.

19. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u A country’s productivity determines its living standards.

20. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economics trains you to.... u Think in terms of alternatives. u Evaluate the cost of individual and social choices. u Examine and understand how certain events and issues are related.

21. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.