Ten principles of economics

Lecture 1

Objectives
to understand what is economics about
to see how people make decisions

to know how people interact

to understand how the economy as a whole works

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Ten principles of economics

What is economics about?

Origin of the word economy?
Gr. Oikonomos = one who manages a household

Scarcity - society has limited resources and therefore cannot produce all the
goods and services people wish to have
Economics is the study of how society manages its scarce resources

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Ten principles of economics

Ten principles of economics

How people make decisions

7. Governments can sometimes improve market

outcome

1. People face trade-offs

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

How

the

economy

as

whole

3. Rational people think at the margin

works

4. People respond to incentives

8. A countys standard of living depends on its

ability to produce goods and services

How people interact

9. Prices rise when the government prints too

5. Trade can make everyone better off

much money

6. Markets are usually a good way to organize

10. Society faces a short-run trade-off between

economic activity

inflation and unemployment

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Ten principles of economics

How people make decisions

1. People Face Trade-offs
job education
How do you spend your money?
Efficiency - equality

2. The Cost of Something Is What You Give Up to Get It

What is the cost of attending the faculty?

opportunity cost - what you give up to get that item

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Ten principles of economics

How people make decisions

3. Rational People Think at the Margin
What are rational people?
Example: coach company, airplane company, last-minute holidays
Rational people often make decisions by comparing marginal benefits and marginal

costs.

4. People Respond to Incentives

what happens when the price of holidays rises in Turkey?
what is the effect of a new / increased tax on gasoline? Or on alcohol (since 1
September 2013)?
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Ten principles of economics

How people interact

5. Trade Can Make Everyone Better Off
Why do we trade?

6. Markets Are Usually a Good Way to Organize Economic Activity

centrally planned economy market economy
Invisible hand and government intervention

7. Governments Can Sometimes Improve Market Outcomes

the invisible hand can work its magic only if the government enforces the rules and
maintains the institutions that are key to a market economy
property rights, market failure (externality), market power
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Ten principles of economics

How economy as a whole works

8. A Countrys Standard of Living Depends on Its Ability to Produce Goods
and Services
How do you explain the differences in living standards around the world?
productivity

9. Prices Rise When the Government Prints Too Much Money

inflation

hyperinflation

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Ten principles of economics

How economy as a whole works

10.

Society

Faces

Short-Run

Trade-off

between

Inflation

and

Unemployment
Unemployment
Increasing the amount of money increase demand and increase the inflation
companies hire new workers decrease unemployment
Usually politicians are interested in reducing unemployment

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Ten principles of economics

Conclusions
people face trade-offs among alternative goals
the cost of any action is measured in terms of forgone opportunities
rational people make decisions by comparing marginal costs and marginal benefits
people change their behavior in response to the incentives they face
trade and interdependence can be mutually beneficial
markets are usually a good way of coordinating economic activity
the government can potentially improve market outcomes by remedying a market failure or by
promoting greater economic equality
productivity is the ultimate source of living standards
growth in the quantity of money is the ultimate source of inflation
society faces a short-run trade-off between inflation and unemployment

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Ten principles of economics

Vocabulary
scarcity = raritate

externality = externalitate

efficiency = eficien

productivity = productivitate

equality = egalitate

inflation = inflaie

oportunity cost = cost de oportunitate

hyperinflation = hiperinflaie

marginal change = modificare marginal

business cycle = ciclu economic

incentive = stimulent

household = gospodrie

property rights = drepturi de proprietate

market failure = eecul pieei
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Ten principles of economics

Bibliography
Mankiw N.G. Principles of Economics (Sixth Edition), South-Western
Cengage Learning, 2012, p. 3 - 20

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Ten principles of economics