1. Ten Principles of Economics1
Ten Principles of Economics

2. TEN PRINCIPLES OF ECONOMICS
Economics is the study of how society manages its scarce resources.

3. Microeconomics and Macroeconomics
Microeconomics focuses on the individual parts of the economy.
How households and firms make decisions and how they interact in specific markets
Macroeconomics looks at the economy as a whole.
Economy-wide phenomena, including inflation, unemployment, and economic growth 13

4. TEN PRINCIPLES OF ECONOMICS
How people make decisions.
People face tradeoffs.
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.

5. TEN PRINCIPLES OF ECONOMICS
How people interact with each other.
Trade can make everyone better off.
Markets are usually a good way to organize economic activity.
Governments can sometimes improve economic outcomes.

6. TEN PRINCIPLES OF ECONOMICS
The forces and trends that affect how the economy as a whole works.
The standard of living depends on a country’s production.
Prices rise when the government prints too much money.
Society faces a short-run tradeoff between inflation and unemployment.

7. Thinking Like an Economist2
Thinking Like an Economist

8. Thinking Like an Economist
Economics trains you to
Think in terms of alternatives.
Evaluate the cost of individual and social choices.
Examine and understand how certain events and issues are related. 2

9. The Scientific Method: Observation, Theory, and More Observation
Uses abstract models to help explain how a complex, real world operates.
Observe fact
Devise theory
Collect data
Test Theory 4

10. Economic Models
Economists use models to simplify reality in order to improve our understanding of the world
Focus on specific relationships between variables

11. Figure 1 The Circular Flow
Firms sell
Households buy
MARKETS
FOR
GOODS AND SERVICES
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
FIRMS
Produce and sell
goods and services
Hire and use factors
of production
Buy and consume
goods and services
Own and sell factors
of production
HOUSEHOLDS
Households sell
Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
Factors of
production
Labor, land,
and capital
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars
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12. The Circular-Flow Diagram
Firms
Produce and sell goods and services
Hire and use factors of production
Households
Buy and consume goods and services
Own and sell factors of production 7

13. The Circular-Flow Diagram
Markets for Goods and Services
Firms sell
Households buy
Markets for Factors of Production
Households sell
Firms buy 7

14. The Production Possibilities Frontier
The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. 14

15. Figure 2 The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000 D C
2,200
600 A
700
2,000
Production
possibilities
frontier
1,000
300 B
1,000
Quantity of
Cars Produced
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16. Our Second Model: The Production Possibilities Frontier
Concepts Illustrated by the Production Possibilities Frontier
Efficiency
Tradeoffs
Opportunity Cost
Economic Growth 21

17. Figure 3 A Shift in the Production Possibilities Frontier
Quantity of
Computers
Produced
4,000
3,000
1,000
2,100
750 E
2,000
700 A
Quantity of
Cars Produced
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18. POSITIVE VERSUS NORMATIVE ANALYSIS
Positive statements are statements that attempt to describe the world as it is.
Called descriptive analysis
Normative statements are statements about how the world should be.
Called prescriptive analysis 31

19. POSITIVE VERSUS NORMATIVE ANALYSIS?
Positive or Normative Statements?
An increase in the minimum wage will cause a decrease in employment among the least-skilled.
POSITIVE
Higher federal budget deficits will cause interest rates to increase. ? ? 32

20. POSITIVE VERSUS NORMATIVE ANALYSIS?
Positive or Normative Statements?
The income gains from a higher minimum wage are worth more than any slight reductions in employment.
NORMATIVE
State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor. ? ? 32

21. Table 2 Ten Propositions about Which Most Economists Agree
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