Slide 1EconomicsHow People Make DecisionsHow People Make DecisionsHow People InteractHow People InteractHow the Economy WorksHow the Economy WorksConclusionsECON 203: Principles of MicroeconomicsClass 1: Introduction1Economics•The study of how to allocate scarce resources to satisfy unlimited wants and needs.–Scarcity: limited access to material resources.–Wants and needs: defined by “preferences” given by individual “utility functions”.2How People Make Decisions•Principle 1: People face trade-offs.–Some trade-offs are faced at the personal level.•Example: go to college or get a full-time job.–Some trade-offs are faced at the society level.•Example: build a park or a highway.•Principle 2: The cost of something is what you give up to get it.–Opportunity cost: what you give up to get what you choose.•Example: salary earned in a full-time job.3How People Make Decisions•Principle 3: Rational people think at the margin.–Rationality: assumes people choose options that maximize their well-being in a systematic and purposeful manner.–Thinking at the margin: considering the cost/value of each additional unit.•Principle 4: People respond to incentives.–Incentive: the prospect of a punishment or a reward that induces a person to act.4How People Interact•Principle 5: Trade can make everyone better off.–Allows people (and countries) to specialize.•Example: life on a deserted island vs. life in a city.•Principle 6: Markets are usually a good way to organize economic activity.–Central planning.•High cost of gathering information.–Market economies.•Allow decentralized decision making.•The “invisible hand,” supply and demand, and prices.5How People Interact•Principle 7: Governments can sometimes improve market outcomes.–Markets require strong institutions.•Property rights and incentives.–Market failures, externalities, and public goods.•Examples: pollution and national defense.6How the Economy Works•Principle 8: A country’s standard of living depends on its ability to produce goods and services.–Differences in productivity: the amount of goods and services produced by each unit of labor.•Principle 9: Prices rise when the government prints too much money.–Supply and demand for money.–Inflation: increase in the overall level of prices in the economy.7How the Economy Works•Principle 10: Society faces a short-run trade-off between inflation and unemployment.–Monetary policy vs fiscal policy.•More money Demand for goods More jobs•Increase demand More jobs Higher prices8Conclusions•Economic principles can be used to describe how people make everyday decisions and the interaction between people and the society.–Traditional economic problems concern money and spending decisions.–Economic principles and reasoning can be applied to majority of everyday choices.•People unconsciously use cost-benefit analysis when making most decisions.•Economics provides tools to improve our cost-benefit analysis and understand how the society
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