Principles of Economics Flashcards

Lecture 1: Principles of Economics

Course Overview

• Objectives:
  • Understand the basic principles of economics.
  • Learn about the concerns of economics and how economists approach problems.
• Resources:
  • Textbook: Chapter 1 of "Ten Principles of Economics."

Part 1: About This Course

• What is Economics?
  • Economics is the study of how society manages its scarce resources.
  • It encompasses how people make decisions (work, buy, sell, produce, save), how the economy as a whole works (growth, unemployment, inflation), and the government's role in these decisions.
• Examples of Economic Problems:
  • Impact of legalized abortion on crime.
  • Impact of immigration on wages, unemployment, and crime.
  • Information friction and post-secondary enrollment.
  • Rationality of enforcing taboos.
  • Polarized opinions.
  • Formation and change of values.
  • Peer pressure in education (e.g., "Cool to be Smart or Smart to be Cool?").
  • Discrimination in the labor market.

Ten Principles of Economics

• The term "economy" originates from the Greek word for "one who manages a household."
• Scarcity: The limited nature of society's resources.
  • Management of resources (people, land, buildings, machinery) is crucial because resources are scarce.
• Economics: The study of how society manages its scarce resources.
• Key Questions Addressed:
  • When and why is trade with other countries useful?
  • Why do we have markets, and what role should the government play in them?

Textbook

• "Principles of Microeconomics" by Mankiw/Kneebone/McKenzie (Eight Canadian Edition).
• Other editions are acceptable if they cover the indicated chapters in the course outline.

Part 2: Ten Principles of Economics

• Based on Chapter 1.

Fundamental Economic Questions

• Every society must answer these three questions:
  1. What to produce?
  2. How to produce it?
  3. To whom will the products be distributed?

Active Learning Discussion

• Scenario: You are trapped on an island with limited food (Kit Kat bars) and must build a boat to escape. How do you distribute food, considering varying productivity levels among group members?

How People Make Decisions

Principle #1: People Face Tradeoffs

• "There ain't no such thing as a free lunch."
• Efficiency: Society gets the maximum benefits from its scarce resources.
• Equity: Distributing economic prosperity fairly among society members.

Active Learning Discussion

• Example 1: If offered an all-expenses-paid day on a luxury yacht, what is the cost of accepting this offer?
• Example 2: As a high-level manager with good pay, would you immediately accept an offer to become CEO with an exceptional raise? Consider the commitment involved.

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

• Opportunity Cost: What must be given up to obtain an item.

Principle #3: Rational People Think at the Margin

• Rational People: Systematically and purposefully do the best they can to achieve their objectives.
• Marginal Changes: Small incremental adjustments to a plan of action.

Rationality

• Important aspects:
  • Systematically
  • Purposefully
  • Doing the best they can
  • To achieve their objectives

Optimal Decisions

• Marginal analysis is key.
• Optimal: The "best" choice given objectives and constraints.
• Compare marginal gains to marginal costs.
• The optimal choice occurs when marginal gains equal marginal costs, which benefits both the individual and potentially society.

Principle #4: People Respond to Incentives

• Incentive: Something that induces a person to act (carrot and stick).
• People respond to "prices" (incentives).

Active Learning Discussion

• You're selling a 1996 Mustang and have spent 1000 on repairs. The transmission fails, costing 600 to repair. Should you repair it or sell it "as is"?
  • Scenario A: Blue Book value is 6500 with working transmission, 5700 without.
  • Scenario B: Blue Book value is 6000 with working transmission, 5500 without.

Active Learning Answers

• Scenario A: Benefit of fixing transmission = 6500 - 5700 = 800. Worthwhile to fix.
• Scenario B: Benefit of fixing transmission = 6000 - 5500 = 500. Not worthwhile to fix.

Observations

• The initial 1000 spent on repairs is irrelevant. Focus on the marginal cost and benefit of repairing the transmission.
• Change in incentives alters the decision.

How People Interact

• Decisions affect others, not just ourselves.

Principle #5: Trade Can Make Everyone Better Off

• Property Rights: The ability of an individual to own and control scarce resources.

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity

• Market Economy: An economy that allocates resources through decentralized decisions of firms and households interacting in markets.
• Adam Smith's "invisible hand" guides markets to desirable outcomes (1776).

Principle #7: Governments Can Sometimes Improve Market Outcomes

• Reasons for government intervention:
  1. Enforce property rights.
  2. Improve efficiency and equity.

Government's Role

• Examples:
  • Public schools (K–12)
  • Workplace safety regulations
  • Public highways
  • Patent laws

Market Failure

• Market Failure: A situation where a market fails to allocate resources efficiently.
• Externality: The impact of one person’s actions on the well-being of a bystander.
• The goal of equity addresses disparities in economic well-being.

How the Economy as a Whole Works

Note

• These are not the only important principles of economics but good starting point

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.

Principle #9: Prices Rise When the Government Prints Too Much Money

• Inflation: An increase in the overall level of prices in the economy.

Principle #10: Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

• This tradeoff is vital in analyzing the Business Cycle
• Business Cycle: Irregular and unpredictable fluctuations in economic activity, measured by production or employment.