10_Princ_pios_de_Economia_-_Mankiw__cap_1

Introduction

• Professor: Pedro Raffy Vartanian

• Topic: 10 Principles of Economics by Mankiw, Chapter 1

Objectives of the Class

• Introduction to Microeconomics

• Important Concepts

• Decision Making: How do people make decisions?

• Interactions: How do people interact?

• Economic Functioning: How does the economy work?

Ten Principles of Economics

• Definition of Economics: Derived from Greek "oikonomos" meaning "one who manages a household".

• Family Decisions: Families must allocate scarce resources amidst their skills, efforts, and desires.

• Societal Decisions: Societies must allocate production of goods and services due to limited resources.

Scarcity and Resource Management

• Scarcity: Limited resources available to society.

• Economics: Study of how society manages its scarce resources.

• Focus of Economists:

  • How individuals make decisions

  • How individuals interact with each other

  • How forces/trends impact the economy as a whole.

How People Make Decisions

Principle 1: Tradeoffs

• Decision-making requires choosing one goal over another.

  • Student Example: Time allocation between studies and leisure.

  • Society Example: National defense vs. consumer goods.

  • Environmental Tradeoff: Pollution control vs. rapid economic growth.

  • Efficiency vs. Equality: Balancing max output vs. fair distribution.

Tradeoffs in Economics

• Definition: A conflict situation where economic actions to resolve one issue result in unintended consequences in another area.

• Example: Lowering unemployment may lead to a rise in inflation, demonstrating a tradeoff between inflation and unemployment.

Further Analysis on Tradeoffs

• Efficiency: Society maximizes the utility of its limited resources. Value in size of the economic 'cake'.

• Equality: Distribution of benefits derived from resources is even among members. Refers to the division of the economic 'cake'.

Principle 2: Costs and Benefits

• Cost of an Action (Opportunity Cost): The sacrifice made to obtain something else.

Principle 3: Marginal Thinking

• Marginal Analysis: Rational agents make incremental adjustments to enhance their objectives.

• Decision Criteria: Comparing marginal benefits to marginal costs.

Principle 4: Response to Incentives

• Definition of Incentive: A factor that motivates change in behavior.

  • Example: Higher prices lead consumers to buy less and producers to offer more.

• Public Policy: Altering costs and benefits can change human behavior.

  • Example: Traffic ticket enforcement via photo radars.

Incentives Influence Actions

• Gasoline Tax: Affects the size and efficiency of vehicles (e.g., car size differences between the U.S. and Europe).

• Unintended Consequences: Policies must consider how they impact incentives.

How People Interact

Principle 5: Benefits of Trade

• Trade: Enables specialization, allowing individuals and countries to focus on strengths, enhancing variety and efficiency.

• Comparative Advantage: Countries gain from trading based on specialization.

Principle 6: Market Efficiency

• Central Planning: In communist countries, centralized planners attempted to allocate resources.

  • Key Questions Addressed: What to produce? How much? Who produces and consumes?

• Market Economy: Resource allocation occurs through decentralized decisions.

  • Interaction in markets leads to resource distribution based on self-interest, reflecting Adam Smith's "invisible hand" idea.

Role of Government in Markets

Principle 7: Government Intervention

• Necessity for Government: Ensures rule compliance, maintains institutions, protects property rights.

• Property Rights: Control over scarce resources is critical.

• Market Failures: Government helps to enhance efficiency and equality.

• Public Goods and Common Resources: Differentiates between excludable and rival goods.

Economic Functioning

Principle 8: Standard of Living

• Influence of Productivity: A nation’s capability to produce goods/services affects living standards.

Principle 9: Money Supply and Inflation

• Definition of Inflation: General price increase levels in an economy.

• Causes: Excessive money supply leads to inflation.

Principle 10: Short-term Tradeoff

• Inflation vs. Unemployment Tradeoff: Increased money supply temporarily boosts consumption, which may eventually lead to inflation but reduces unemployment.

• Business Cycles: Economic fluctuations are measured by employment/production levels.

Table of Economic Principles

1. The people face tradeoffs.

2. The cost of something is what you give up to get it.

3. Rational people think at the margin.

4. People respond to incentives.

5. Trade can make everyone better off.

6. Markets are usually a good way to organize economic activity.

7. Governments can sometimes improve market outcomes.

8. A country's standard of living depends on its ability to produce goods and services.

9. Prices rise when the government prints too much money.

10. Society faces a short-run tradeoff between inflation and unemployment.

The Paradox of Water and Diamonds

• Water: Essential, abundant, and inexpensive.

• Diamond: Scarce, valuable, and expensive.

• Utility Marginal Relation: Price reflects scarcity vs. abundance in the context of utility.