Chapter 1 Chapter 1 The Principles and Practice of Economics © 2015 Pearson Education, Ltd.

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Ten Principles of Economics

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Chapter 1 Chapter 1 The Principles and Practice of Economics © 2015 Pearson Education, Ltd.

Chapter Outline 1.1 The Scope of Economics 1.2 Three Principles of Economics 1.3 The First Principle of Economics: Optimization 1.4 The Second Principle of Economics: Equilibrium 1.5 The Third Principle of Economics: Empiricism 1.6 Is Economics Good for You? 1 The Principles and Practice of Economics © 2015 Pearson Education, Ltd.

Key Ideas 1.Economics is the study of people’s choices. 2.The first principle of economics is that people try to optimize; they try to choose the best available option. 3.The second principle of economics is that economic systems tend to be in equilibrium, a situation in which nobody would benefit by changing his or her own behavior. 1 The Principles and Practice of Economics © 2015 Pearson Education, Ltd.

Key Ideas 4.The third principle of economics is empiricism—analysis that uses data. Economists use data to test theories and to determine what is causing things to happen in the real world. 1 The Principles and Practice of Economics © 2015 Pearson Education, Ltd.

Evidenced-Based Economics Example: What is the cost of using Facebook? 1 The Principles and Practice of Economics © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics What area of your life is NOT covered by economics? © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics Economic Agent = Any group or individual that makes choices, such as consumers, firms, parents, politicians, etc. © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics What does it mean if something is “scarce”? © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics Economics studies how agents make choices among scarce resources and how those choices affect society. © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics How many pieces should each person have taken? © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics Positive Economics Some people took more than one and not everyone got a piece Normative economics Each student should just take one so that everyone gets a piece © 2015 Pearson Education, Ltd.

1.1 The Scope of Economics Microeconomics The study of individuals, firms, government Macroeconomics The study of the whole economy © 2015 Pearson Education, Ltd.

1.2 Three Principles of Economics Three Principles of Economics: 1. Optimization = making the best choice possible with given information 2. Equilibrium = when everyone is optimizing; no one would be better off with a different choice 3. Empiricism = using data to figure out answers to interesting questions © 2015 Pearson Education, Ltd.

1.3 The First Principle of Economics: Optimization Trade-offs and Budget Constraints What is the optimal level of crime? © 2015 Pearson Education, Ltd.

1.3 The First Principle of Economics: Optimization Opportunity Cost You want to buy a $20 book. If you drive 3 miles, you can buy it for $10. You want to buy a $1,000 computer. If you drive 3 miles, you can buy it for $990. © 2015 Pearson Education, Ltd.

1.3 The First Principle of Economics: Optimization Cost-Benefit Analysis Benefits Costs © 2015 Pearson Education, Ltd.

1.3 The Principles and Practice of Economics Evidenced-Based Economics Example: What is the cost of using Facebook? © 2015 Pearson Education, Ltd.

1.4 The Second Principle of Economics: Equilibrium Equilibrium A situation when no one benefits by changing his/her behavior © 2015 Pearson Education, Ltd.

1.4 The Second Principle of Economics: Equilibrium What Does Equilibrium Really Mean? © 2015 Pearson Education, Ltd.

1.4 The Second Principle of Economics: Equilibrium The Free Rider Problem Exists when an individual or group is able to enjoy the benefits of a situation without incurring the costs © 2015 Pearson Education, Ltd.

1.4 The Second Principle of Economics: Equilibrium Which one is experiencing equilibrium? © 2015 Pearson Education, Ltd.

1.4 The Second Principle of Economics: Equilibrium Is there an incentive for him to change his behavior? © 2015 Pearson Education, Ltd.

1.4 The Second Principle of Economics: Equilibrium Is this an equilibrium? © 2015 Pearson Education, Ltd.

1.5 The Third Principle of Economics: Empiricism Crowded beaches and hot temperatures go together. So if we want to make it cooler, keep people from going to the beach! © 2015 Pearson Education, Ltd.

1.6 Is Economics Good for You? What are the costs and benefits of this course? © 2015 Pearson Education, Ltd.

1.6 Is Economics Good for You? Costs Tuition Other courses Sleep? Stress? © 2015 Pearson Education, Ltd.

1.6 Is Economics Good for You? © 2015 Pearson Education, Ltd.