CHAPTER
1
DYNAMIC P OWERP OINT™ S LIDES BY S OLINA L INDAHL
The Big Ideas
CHAPTER OUTLINE
10 Big Ideas in Economics:
1.
Incentives Matter
2.
Good Institutions align
Self-interest with the
Social interest
3.
Trade-offs are
Everywhere
4.
Thinking on the Margin
5.
The Power of Trade
6.
The importance of
Wealth and Economic
growth
7.
Institutions matter
8.
Economic booms and
busts cannot be avoided
but can be moderated
9.
Prices rise when the
government prints too
much money
10. Central banking is a
hard job
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questions
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Video
Food for Thought….
Some good blogs and other sites to get the juices flowing:
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”
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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.
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Big idea #2: Good Institutions Align
Self-interest with the Social Interest
Markets magically align your selfinterest with social interest (usually)
Because the cheesemonger wants profit;
you get your cheese!
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SEE 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.
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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.
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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)
.
http://www.youtube.com/watch?v=jbkSRLYSojo
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Big idea #6: The Importance of
Wealth and Economic Growth
Wealth brings higher standards of living.
Understanding economic growth is
crucial.
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SEE THE INVISIBLE HAND
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.
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14
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Can you
tell which
country has
better
institutions?
North and
South
Korea at
night
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?
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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?
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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.
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Try it!
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.
a)
b)
Traditional burials will increase and
cremation will decrease.
Cremation will increase and
traditional burials will decrease.
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True or false: As women’s wages
have risen over the past 50 years,
the opportunity cost of being a stayat-home mother has risen.
a) True
b) False
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Would you expect to
find companies
developing cures for
rare diseases or
common ones? Think
about incentives.
a) Rare diseases
b) Common diseases
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In which country would a person face a
lower opportunity cost for holding cash?
a) Zimbabwe
b) The U.S.
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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.
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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.
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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
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