Aug 5, 2024
0
The principles of
HOW PEOPLE
MAKE DECISIONS
©lithian/Shutterstock.com
Loading…
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 1
People Face Tradeoffs
All decisions involve tradeoffs. Examples:
●Going to a party the night before your midterm leaves less time for studying.
●Having more money to buy stuff requires working longer hours, which leaves less time
for leisure.
●Protecting the environment requires resources
that could otherwise be used to produce
consumer goods.
0
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 2
The Cost of Something Is
What You Give Up to Get It
●Making decisions requires comparing the costs and benefits of alternative choices.
●The opportunity cost of any item is
whatever must be given up to obtain it.
●It is the relevant cost for decision making.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 2
The Cost of Something Is
What You Give Up to Get It
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition, books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 3
Rational People Think at the Margin
Rational people
●systematically and purposefully do the best they can to achieve their objectives.
●make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 3
Rational People Think at the Margin
Examples:
●When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income
he could earn with the extra year of education.
●When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 4
People Respond to Incentives
●Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment.
●Rational people respond to incentives.
Examples:
●When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs.
●When cigarette taxes increase,
teen smoking falls.
Loading…
0 The principles of HOW PEOPLE INTERACT
©Pressmaster/Shutterstock.com
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 5
Trade Can Make Everyone Better Off
●Rather than being self-sufficient,
people can specialize in producing one good or service and exchange it for other goods.
●Countries also benefit from trade and specialization:
●Get a better price abroad for goods they produce
●Buy other goods more cheaply from abroad than could be produced at home
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
●Market: a group of buyers and sellers
(need not be in a single location)
●“Organize economic activity” means determining
●what goods to produce
●how to produce them
●how much of each to produce
●who gets them
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
●A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets.
●Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 6
Markets Are Usually A Good Way to
Organize Economic Activity
●The invisible hand works through the price system:
●The interaction of buyers and sellers
determines prices.
●Each price reflects the good’s value to buyers and the cost of producing the good.
●Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 7
Governments Can Sometimes
Improve Market Outcomes
●Important role for govt: enforce property rights
(with police, courts)
●People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 7
Governments Can Sometimes
Improve Market Outcomes
●Govt may alter market outcome to
promote equity.
●If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided.
0 The principles of HOW THE ECONOMY AS A WHOLE WORKS
©nopporn/Shutterstock.com
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 8
A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services
●Huge variation in living standards across countries and over time:
●Average income in rich countries is more than ten times average income in poor countries.
●The U.S. standard of living today is about
eight times larger than 100 years ago.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 8
A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services
●The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor.
●Productivity depends on the equipment, skills, and technology available to workers.
●Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 9
Prices Rise When the Government Prints Too Much Money
●Inflation: increases in the general level of prices.
●In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall.
●The faster the govt creates money,
the greater the inflation rate.
0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PRINCIPLE 10
Society Faces a Short-run Tradeoff Between Inflation and Unemployment
●In the short-run (1–2 years),
many economic policies push inflation and unemployment in opposite directions.
●Other factors can make this tradeoff more or less favorable, but the tradeoff is always present.