TEN PRINCIPLES OF ECONOMICS Chapter 1 ECON202, Maclachlan

ECONOMY From the Greek for one who manages a household. Key concept: scarcity. ECON202, Maclachlan

Definition Economics: the study of how society manages its scarce resources. Mankiw summarizes all of economics with 10 principles … ECON202, Maclachlan

1. People face trade-offs. ECON202, Maclachlan

2. The cost of something is what you give up to get it. ECON202, Maclachlan

3. Rational people think at the margin. ECON202, Maclachlan

4. People respond to incentives. ECON202, Maclachlan

5. Trade can make everyone better off. ECON202, Maclachlan

6. Markets are usually a good way to organize economic activity. ECON202, Maclachlan

Governments can sometimes improve market outcomes. ECON202, Maclachlan

8. A country’s standard of living depends on its ability to produce goods and services. ECON202, Maclachlan

9. Prices rise when the government prints too much money. ECON202, Maclachlan

10. Society faces a short-run tradeoff between inflation and unemployment. ECON202, Maclachlan

Economists as Advisors Harry Truman said he wanted a one-armed economist. ECON202, Maclachlan

Ten Things Economists Agree On A ceiling on rents reduces the quantity and quality of housing available. (93%) Tariffs and import quotas usually reduce general economic welfare. (93%) Flexible and floating exchange rates offer an effective international monetary arrangement. (90%) Fiscal policy has a significant stimulative impact on a less than fully employed economy. (90%) ECON202, Maclachlan

5. If the federal budget deficit is to be balanced, it should be done over the business cycle rather than yearly. (85%) 6. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%) 7. A large federal budget deficit has an adverse effect on the economy. (83%) 8. A minimum wage increases unemployment among young and unskilled workers. (79%) ECON202, Maclachlan

9. The government should restructure the welfare system along the lines of a “negative income tax.” (79%) 10. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%) ECON202, Maclachlan

Thinking Like an Economist Chapter 2 ECON202, Maclachlan

Scientific Methodology “The whole of science is nothing more than the refinement of everday thinking.” --Albert Einstein ECON202, Maclachlan

Observation Theory More Observation ECON202, Maclachlan

Role of Assumptions A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Lets build a fire and heat the can first." The economist says, "Lets assume that we have a can-opener...“ --Paul Samuelson ECON202, Maclachlan

The Production Possibilities Frontier ECON202, Maclachlan

A Shift in the Production Possibilities Frontier ECON202, Maclachlan

The Circular Flow ECON202, Maclachlan

Microeconomics vs. Macroeconomnics Micro: the study of how households and firms make decisions and how they interact in markets. Macro: the study of economy-wide phenomena, including inflation, unemployment and growth ECON202, Maclachlan

Positive vs. Normative Statements Positive statements: claims that attempt to describe the world as it is. Normative statements: claims that attempt to prescribe how the world should be. ECON202, Maclachlan

Figure A-1 Types of Graphs ECON202, Maclachlan

Figure A-2 Using the Coordinate System ECON202, Maclachlan

Table A-1 Novels Purchased by Emma Copyright©2003 Southwestern/Thomson Learning

Figure A-3 Demand Curve ECON202, Maclachlan

Figure A-4 Shifting Demand Curves ECON202, Maclachlan

Figure A-5 Calculating the Slope of a Line ECON202, Maclachlan

Figure A-6 Graph with an Omitted Variable ECON202, Maclachlan

Figure A-7 Graph Suggesting Reverse Causality ECON202, Maclachlan