The Big Ideas

10 Big Ideas in Economics: The importance of Wealth and Economic growth Incentives Matter Good Institutions align Self-interest with the Social interest Institutions matter Economic booms and busts cannot be avoided but can be moderated Trade-offs are Everywhere Prices rise when the government prints too much money Thinking on the Margin The Power of Trade Central banking is a hard job To Try it! questions For applications, click here To Video

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Incentives in the Prisoner Transport Business Only when the ship captains began to be paid per living convict on arrival did the death rate fall from over 33% to less than 1% The British prison transport vessel “Success”

Big idea #1: Incentives Matter Incentives: rewards and penalties that motivate behavior. People respond to incentives in predictable ways. Self-interest is an important incentive in economics.

Big idea #2: Good Institutions Align Self-interest with the Social Interest Markets magically align your self-interest with social interest (usually) Because the cheese-monger wants profit; you get your cheese!

Adam Smith saw the invisible hand “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” -Adam Smith, The Wealth of Nations Adam Smith saw the invisible hand

Big idea #3: Trade-offs are Everywhere For every choice something is gained, something lost. The Opportunity Cost of a choice: the value of the opportunities lost. AND people respond to changes in opportunity costs. Unemployment rates and college enrollment: related.

Big idea #4: Thinking on the Margin Actual trade-offs are usually “on the margin.” Marginal means additional Most economic choices are marginal choices E.G. Newt Gingrich wanted mandatory executions for drug dealers… but the effect was to reduce the EXTRA penalty for murdering police offers during arrest Higher punishments for lesser crimes reduce the marginal cost of harsher crimes.

Big idea #5: The Power of Trade Hans Rosling's famous lectures combine enormous quantities of public data with a sport's commentator's style to reveal the story of the world's past, present and future development. (4:48 minutes) . More about this programme: http://www.youtube.com/watch?v=jbkSRLYSojo Hans Rosling's famous lectures combine enormous quantities of public data with a sport's commentator's style to reveal the story of the world's past, present and future development. Now he explores stats in a way he has never done before - using augmented reality animation. In this spectacular section of 'The Joy of Stats' he tells the story of the world in 200 countries over 200 years using 120,000 numbers - in just four minutes. Plotting life expectancy against income for every country since 1810, Hans shows how the world we live in is radically different from the world most of us imagine. http://www.youtube.com/watch?v=jbkSRLYSojo Back to

Big idea #6: The Importance of Wealth and Economic Growth Wealth brings higher standards of living. Understanding economic growth is crucial.

World Distribution of Income, 2000. Source: Penn World Tables

Big idea #7: Institutions Matter Why are some countries rich and others poor? Incentives are sometimes lacking. Strong institutions that support these incentives foster economic growth.

North and South Korea at night Can you tell which country has better institutions?

Big idea #8: Economic Booms and Busts Cannot Be Avoided but Can Be Moderated Policymakers use Fiscal Policy and Monetary Policy to attempt to smooth out this economic volatility. Can we make the economy smoother?

Big idea #9: Prices Rise When the Government Prints Too Much Money Inflation is an increase in the general level of prices. Heavily indebted nations often print money to pay down debt. Zimbabwe: highest inflation ever Brother can you spare 10 million Zim dollars?

Big idea #10: Central Banking Is a Hard Job The Federal Reserve is the U.S.’s central bank. “The Fed” is in charge of money supply Helping the economy be stable Balancing inflation and unemployment Preventing banking crises? Ben Bernanke, Chairman of the Fed, wondering where the nearest aspirin supply is.

; As land prices near the U.S. coast increase, what changes do you expect to see in burial practices (other things equal)? Think opportunity cost. Traditional burials will increase and cremation will decrease. Cremation will increase and traditional burials will decrease. To next Try it!

True or false: As women’s wages have risen over the past 50 years, the opportunity cost of being a stay-at-home mother has risen. True False To next Try it!

Would you expect to find companies developing cures for rare diseases or common ones? Think about incentives. Rare diseases Common diseases To next Try it!

In which country would a person face a lower opportunity cost for holding cash? Zimbabwe The U.S. Back to

Bastiat: Good Economics vs Bad Economics In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

Bastiat: Good Economics vs Bad Economics There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Bastiat: Good Economics vs Bad Economics Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. - Frederic Bastiat