Economics and Active Learning Essay

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9/17/2012

Chapters 1-2 Notes
 Reading (Chapters 1-2, Skip Circular Flow diagram in ch. 2) Mankiw Text
Topics: Basic Principles of Economics relevant
T i
B i Pi i l fE i l t to Microeconomics & Thinking like an economist For HW, please do Chapter 1 Problems &
Applications, #1(same as 5e), #5(same as 5e) &
#6(#7 in 5e); Chapter 2, Problems &
Applications, #2 (same as 5e) & #6(same as 5e)

What Economics Is All About
 Scarcity: the limited nature of society’s resources  Economics: the study of how society manages its scarce resources, e.g.
 how people decide what to buy, how much to work, save, and spend
 how firms decide how much to produce, how many workers to hire
 how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs
TEN PRINCIPLES OF ECONOMICS

1

1

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HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
All decisions involve tradeoffs. Examples:

 Going to a party the night before your midterm leaves less time for studying.

 Having more money to buy stuff requires working longer hours, which leaves less time for leisure.

 Protecting the environment requires resources that could otherwise be used to produce consumer goods.
TEN PRINCIPLES OF ECONOMICS

2

HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs

 Society faces an important tradeoff: efficiency vs equality vs.  Efficiency: when society gets the most from its scarce resources

 Equality: when prosperity is distributed uniformly among society’s members

 Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor.
But this reduces incentive to work and produce, shrinks the size of the economic “pie.”
TEN PRINCIPLES OF ECONOMICS

3

2

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HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is
What You Give Up to Get It

 M ki d i i
Making decisions requires comparing th costs i i the t and benefits of alternative choices.

 The opportunity cost of any item is whatever must be given up to obtain it.

 It is the relevant cost for decision making making. TEN PRINCIPLES OF ECONOMICS

4

HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is
What You Give Up to Get It
Examples:
E amples
The opportunity cost of…
…going to college for a year is not just the tuition, books, and fees, but also the foregone wages.
…seeing a movie is not j g just the p price of the ticket,
,
but the value of the time you spend in the theater.

TEN PRINCIPLES OF ECONOMICS

5

3

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HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the
Margin
Rational people
R ti l l

 systematically and purposefully do the best they can to achieve their objectives.

 make decisions by evaluating costs and benefits g g j of marginal changes – incremental adjustments to an existing plan.

TEN PRINCIPLES OF ECONOMICS

6

HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the
Margin
Examples:

 When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education.

 When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue.
TEN PRINCIPLES OF ECONOMICS

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HOW PEOPLE MAKE DECISIONS
Principle #4: People Respond to Incentives

 Incentive: something that induces a person to act, i.e. act i e the prospect of a reward or punishment punishment.  Rational people respond to incentives.
Examples:
 When gas prices rise, consumers buy more y g guzzling SUVs. g hybrid cars and fewer gas g
 When cigarette taxes increase, teen smoking falls.
8

TEN PRINCIPLES OF ECONOMICS

ACTIVE LEARNING

1

Applying the principles
Show More

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