Ten Principles of Economics
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
© 2011 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.
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Overview
• Self-introduction
• Syllabus
• Ten principles of Economics
Three groups
How People Make Decision (The first four)
How People Interact (discussed later)
How the Economy as a Whole Works
(discussed in later chapters)
Self-Introduction
• Xiaoyi Han (韩晓祎)
• Now an assistant professor at WISE,
Xiamen University (XMU)
• Email: han.293@osu.edu
• Office: D328, Economics Building
• Office hour: Friday, 3: 00 pm -4:30 pm
• Research field: spatial econometrics,
Bayesian econometrics
Self-Introduction (cont'd)
• Hometown: Hainan Island, very south of
China
• Education:
2004-2008, Zhejiang University, Hangzhou,
China
2008 - 2014, Ph.D. in Economics, The Ohio
State University (OSU), Columbus, OH,
USA.
Two TAs
• Xiaoyan Lan (蓝晓燕）
• Tuesday, 2:30-4:30 pm
• 501358608@qq.com
• Xing Zhou (周星）
• Thursday, 4:00-6:00 pm
• 914398026@qq.com
Some comments on Syllabus
• Textbook: Principle of Macroeconomics,
N. Gregory Mankiw, 6th edition, SouthWestern Cengage
• If you buy used version of the textbook
(the 5th, or even the 4th), it's fine. But
pay attention to compare the chapters.
• The course website is
http://hanxiaoyi.weebly.com/teaching.html
All slides, practice questions, answers will
be uploaded on the website .
Quizzes and exams
• 6 Quizzes. Dates of Quizzes are listed in
the syllabus
• Your lowest quiz will be dropped.
• 1 midterm
• 1 final
• Final is cumulative
Attendance
Do I need to attend every lecture? (The class time is
really bad...)
• The answer is: attendance accounts for 5% of
your total grade
• I will randomly check your attendance 4 times
starting from the 3rd lecture.
• Each attendance earns 1.25 points.
• Three (3) or more unexcused absences will
result in automatic failure for the course. This
is the requirement of WISE
• It is up to you to decide whether you should attend
every lecture or not, my suggestion is
• You need to attend the lecture with quizzes or
exams, Otherwise you will lose your credit!!
Bonus from participation
• Class participation is greatly encouraged
• If you contribute to class discussion, you
will receive 0.5 point each lecture
• Try to answer or ask questions, share
your opinions, especially in English
• Note that the maximum bonus points you
can earn from class participation is 4.
What is Economics?
• All economics questions rise when we
want more than we can get
– Our inability to satisfy all our wants is
called scarcity.
– Because we face scarcity(稀缺性), we
must make choices.
– Economics studies the choices that
individuals, businesses, governments,
and entire societies make and their
interactions.
Ten Principles of Economics
• Resources are scarce (Main Assumption)
• Scarcity
– The limited nature of individual or society’s
resources
• Economics
– Study of how society manages its scarce
resources (Macro)
– Study of how individual make decisions
given limited resources (Micro)
© 2011 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.
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How People Make Decisions
Principle 1: People face trade-offs
• Making decisions (choices)
– Trade off one goal against another
– Student – time
– Parents – income
– Society (government, firms)
• National defense vs. consumer goods
• Clean environment vs. high level of income
• Fiscal cliff: Decrease budget deficit vs.
economic growth
© 2011 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.
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How People Make Decisions
Principle 2: The cost of something is what
you give up to get it
• People face trade-offs
– Make decisions
• Compare cost with benefits of alternatives
• Opportunity cost (OC)
– Whatever must be given up to obtain one
item
© 2011 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.
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Classical Example
• The decision to go to college, think about
the OC
• You need to pay tuitions, books rooms..
• But what is the greatest cost? what do
you give up to go to college?
• Your time! if you don't go to college, you
can work and might earn lots of money!
More on OC
• OC emphasizes on the cost size.
• Of course to choose something, you have
to compare the cost with its benefit.
• If the cost of doing A, mainly the OC,
already outweigh the benefits of doing A
• You should not choose A.
Lebron James' Decision
Enter NBA
• Why did Lebron choose to enter NBA instead of
going to college?
• LBJ: compare the cost and benefit of going to
College (OSU)?
• Benefit: NCAA championship, or a bachelor's
degree in economics?
• What's the OC of going to college?
• He would have given up all the potential years
of NBA paycheck and all glories
• The OC is too much campared with the
benefits.
• So he chose to enter NBA
To Miami (2010 Summer)
• Why did Lebron James choose to bring
his talent to the south beach instead of
staying in Cleveland?
• Compare the benefit and the cost of
staying here
• Staying: more glories, or a higher salary?
• The OC of staying: he gave up a higher
likelihood of championship
• The OC of staying exceed the benefit
More on OC
• Usually we will have several alternatives
available when making decisions
• Some textbook define OC as: the highest
valued alternatives that must be given up
• You choose A, have to give up two
alternatives B and C; The value of B is
larger than that of C;
• The OC of doing A is B;
• But we simpify the question: two options
available.
Lebron James finally got his title!
• Actually, we simplify
the question because
at that time he had
many options:
Cleveland, Miami,
Chicago, NY.......
• He believed the best
alternative other than
Cleveland is Miami.
It is not the end....
• 2014 Summer, he chooses to go home,
go back to Cleveland!
• Why did he choose Cleveland over
Miami?
• What is the OC of staying at Miami?
• a larger likelihood of championship
• a longer healthy career
• a better reputation
How People Make Decisions
Principle 3: Rational people think at the
margin
• Rational people (Strong Assumption)
– Systematically & purposefully do the best
they can to achieve their objectives
• Marginal changes
– Small incremental adjustments to a plan of
action
© 2011 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.
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How People Make Decisions
• Marginal benefits
– Additional benefits
• Marginal costs
– Additional costs
• Rational decision maker
– Take action only if:
– Marginal benefits > Marginal costs
© 2011 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.
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Example
• An airline wants to decide how much to
charge passengers who fly standby
• The average cost of flying a passenger is
$500
• The plane is about to take off with 10
empty seats:
• Should the airline sell the ticket at $300?
• Yes! The additional cost of adding one
more is tiny!
• The additional benefit of adding one more
is $300
More on MB and MC
• Marginal cost is different from OC since they
emphasize on different aspects.
• However, in some settings, they might be
related
• A firm decides whether to hire a worker
• MB: additional profit that the worker can bring,
for example, $500;
• MC: wage paid to the worker, say $300
• MB>MC;
• OC of hiring the worker?
• the firm could use $300 to buy other
things(machine). $300 is the OC
How People Make Decisions
Principle 4: People respond to incentives (a very
general principle)
• Incentive
– Something (a reward or a punishment) that
induces a person to act
– Attendance
– Higher price (iphone 6)
• Buyers - consume less
• Sellers - produce more
– Public policy
• Change costs or benefits
• Change people’s behavior
© 2011 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.
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Examples
• LBJ wants to bring his talent to the south
beach because championship is an
incentive for him
• seat belt laws: seat belts give driver
incentives to drive faster because they
lower the likelihood of death in accidents.
More accidents, increase in pedestrian
death
Table 1
Ten Principles of Economics
© 2011 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.
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