PowerPoint Presentations for

Principles of Microeconomics
Seventh Canadian Edition
by Mankiw/Kneebone/McKenzie

Adapted for the

Seventh Canadian Edition by

Marc Prud’homme
University of Ottawa
TEN PRINCIPLES
OF ECONOMICS

Chapter 1

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 TEN PRINCIPLES OF ECONOMICS

The word economy comes from

the Greek word for
“one who manages a household.”

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 TEN PRINCIPLES OF ECONOMICS

The management of society’s resources

(e.g., people, land, buildings, machinery) is
important because resources are scarce.
Scarcity: The limited nature of society’s
resources.

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 TEN PRINCIPLES OF ECONOMICS

Economics: The study of how society

manages its scarce resources.

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 HOW PEOPLE MAKE DECISIONS

PRINCIPLE #1: PEOPLE FACE TRADEOFFS

“There ain’t no such thing as a free lunch.”

Efficiency: The property of society getting the

maximum benefits from its scarce resources.
Equity: The property of distributing economic
prosperity fairly among the members of
society.
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 HOW PEOPLE MAKE DECISIONS

PRINCIPLE #2: THE COST OF SOMETHING

IS WHAT YOU GIVE UP TO GET IT
Opportunity cost: Whatever must be given up
to obtain some item.

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 HOW PEOPLE MAKE DECISIONS
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN
Rational people: People who systematically and
purposefully do the best they can to achieve
their objectives.
Marginal changes: Small incremental
adjustments to a plan of action.

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HOW PEOPLE MAKE DECISIONS

PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES

Incentive: Something that induces a person

to act.

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Active Learning
Discussion Questions

You are selling your 1996 Mustang. You have already

spent $1000 on repairs. At the last minute, the transmission
dies. You can pay $600 to have it repaired or sell the car
“as is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.
A. Blue Book value is $6500 if the transmission works and
$5700 if it doesn’t.
B. Blue Book value is $6000 if the transmission works and
$5500 if it doesn’t.
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Active Learning
Answers

Cost of fixing transmission = $600

A. Blue Book value is $6500 if the transmission works,
$5700 if it doesn’t.
Benefit of fixing the transmission = $800 ($6500 – $5700).
It’s worthwhile to have the transmission fixed.
B. Blue Book value is $6000 if the transmission works,
$5500 if it doesn’t.
Benefit of fixing the transmission is only $500.
Paying $600 to fix the transmission is not worthwhile.
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Active Learning
Answers

Observations:
 The $1000 you previously spent on repairs is irrelevant.
What matters is the cost and benefit of the marginal
repair
(the transmission).
 The change in incentives from scenario A to scenario
B caused your decision to change.

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Quick
Quiz

 Describe an important tradeoff you recently

faced.
 Give an example of some action that has both a
monetary and nonmonetary opportunity cost.
 Describe an incentive your parents offered to
you in an effort to influence your behaviour.

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 HOW PEOPLE INTERACT

PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF

Property rights: The ability of an individual to

own and exercise control over scarce
resources.

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 HOW PEOPLE INTERACT
PRINCIPLE #6: MARKETS ARE USUALLY
A GOOD WAY TO ORGANIZE
ECONOMIC ACTIVITY

 Market economy: An economy

Goran Bogicevic/Shutterstock
that allocates resources through
the decentralized decisions of
many firms and households as they
interact in markets for goods and
services.
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 HOW PEOPLE INTERACT
PRINCIPLE #6: MARKETS ARE USUALLY
A GOOD WAY TO ORGANIZE
ECONOMIC ACTIVITY (CONTINUED)

 In his 1776 book, Adam Smith observed

that households and firms interacting
in markets act as if they are guided by
an “invisible hand” that leads them to
desirable market outcomes.

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 HOW PEOPLE INTERACT

PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE

MARKET OUTCOMES
We need governments for two reasons:
1. To enforce property rights
 Property rights: The ability of an individual to
own and exercise control over scarce resources.

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 HOW PEOPLE INTERACT

PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE

MARKET OUTCOMES (CONTINUED)
2. Because the invisible hand is powerful, but it is
not omnipotent
 Two broad reasons for a government to
intervene in the economy:
1. The goal of efficiency
2. The goal of equity
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Active Learning
Discussion Questions

For each of the following situations, what is the

government’s role? Does the government’s intervention
improve the outcome?
a. Public schools for K–12
b. Workplace safety regulations
c. Public highways
d. Patent laws, which allow drug companies to charge
high prices for life-saving drugs

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 HOW PEOPLE INTERACT
 The goal of efficiency
 Market failure: A situation in which a market left on
its own fails to allocate resources efficiently.
 Externality: The impact of one person’s actions on
the well-being of a bystander.
 The goal of equity
 Even when the invisible hand is yielding efficient
outcomes, it can nonetheless leave sizable
disparities in economic well-being.
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Quick
Quiz

 Why is a country better off not isolating itself

from all other countries?
 Why do we have markets and, according to
economists, what roles should government play
in them?

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HOW THE ECONOMY AS A WHOLE WORKS

PRINCIPLE #8: A COUNTRY’S STANDARD OF LIVING

DEPENDS ON ITS ABILITY TO PRODUCE
GOODS AND SERVICES
Productivity: The quantity of goods and
services produced from each hour of a
worker’s time.

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HOW THE ECONOMY AS A WHOLE WORKS

PRINCIPLE #9: PRICES RISE WHEN THE

GOVERNMENT PRINTS
TOO MUCH MONEY
 Inflation: An increase in the
overall level of prices in the
economy.

Thinkstock
 What causes inflation?

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HOW THE ECONOMY AS A WHOLE WORKS

PRINCIPLE #10: SOCIETY FACES A SHORT-RUN

TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT
 This short-run tradeoff plays a key role in the analysis of the
business cycle.
 Business cycle: The irregular and largely unpredictable
fluctuations in economic activity, as measured by the
production of goods and services or the number of people
employed.

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Quick
Quiz

 List and briefly explain the three principles that

describe how the economy as a whole works.

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TABLE 1.1
Ten Principles of Economics

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Classroom Activity

Getting Dressed in the Global Economy

1. Where did your clothes come from?

2. Who worked to produce your clothes?
3. What things do you consider when buying a
garment?
4. Where were your clothes produced (what
countries)?
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THE END

Chapter 1

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