The American Economy

Ten Principles of Economics

v People Face Tradeoffs

Ø There is no such thing as a free lunch!

Ø Every choice has a tradeoff. These can range from the government tradeoff between national defense and     consumer goods (guns vs. butter) to your tradeoff between sleeping and attending class.

Ø Frequently we encounter a tradeoff between efficiency and equity

v The Cost of Something is What You Give Up to Get IT

Ø Making good decisions means knowing the full costs, including the opportunity costs, of making one choice over another.

Ø What is an opportunity cost? Can you cite examples in your life?

v Rational People Think at the Margin

Ø How does a small incremental adjustment or a marginal change affect your existing plan?

Ø Why should we ignore the costs or benefits that occurred in the past?

v People Respond to Incentives

Ø When marginal benefits or marginal costs change your incentives will change.

Ø Provide some examples where your incentives have changed

v Trade Can Make Everyone Better Off

Ø Even though there is competition among consumers and among producers in different countries, countries can benefit from specializing in what they do best and trade with each other.

v Markets are Usually a Good Way to Organize Economic Activity

Ø Compare the planned economy of the former Soviet Union to the market economy of the United States

Ø Adam Smith explained this invisible hand in 1776, The Wealth of Nations.

§ When household and firms do what is best for themselves, they end up doing what is best for society, as if guided by an invisible hand or market forces

Ø When the government interferes with markets by changing prices through taxation or price controls, the invisible fails and resources are not allocated in the best possible way. That is social welfare is not maximized when the government interferes.

v Governments can sometimes improve market outcomes

Ø There are two reasons for government intervention: to change the (i) Efficiency, the size of the economic pie or (ii) Equity, how the economic pie is divided.

Ø Sometimes the invisible hand fails. Markets can fail to allocate resources efficiently if the economy has externalities or an economic player has market power.

v A country’s standard of living depends on its ability to produce goods and services

Ø Differences in standard of living in nations around the world can be attributed to differences in productivity.

Ø What is productivity?

Ø How can the government use public policy to change productivity?

v Prices Rise when the Government Prints Too Much Money

Ø Examples: The German Hyperinflation and the inflation of Latin America and South America

Ø What is inflation?

v Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

Ø Reducing inflation is often thought to cause a rise in unemployment.

Ø Are there public policy implications based on the tradeoff? How does the structures of the US affect your answer?

 

Chapter 1

Interdependence and the Gains From Trade

Chapter 2

v What is demand?

v What is the relationship between price and quantity and how is this related to the Law of Demand?

v What factors change demand? (Remember there is a difference between a change in demand and a movement along the demand curve.)

Ø Income

§ What is a normal good? Examples?

§ What is an inferior good? Examples?

Ø Price of Related Goods

§ What is a complement? Examples?

§ What is a substitute? Examples?

Ø Tastes

Ø Expectations

Ø Number of Buyers