PowerPoint Presentations for

Principles of Microeconomics
Eighth Canadian Edition [[add new
by Mankiw/Kneebone/McKenzie text cover]]

Adapted for the

Eighth Canadian Edition by

Marc Prud’Homme
University of Ottawa

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 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
 ECONOMICS: the study of how society
manages its scarce resources.
 The management of society’s resources is
important because resources are scarce.
 SCARCITY: the limited nature of society’s
resources.
 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

most it can 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: those who systematically and
purposefully do the best they can to achieve their
objectives.
 MARGINAL CHANGES: small incremental adjustments
to a
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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 work.
B. Blue Book value is $6000 if the transmission works
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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 work.
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 work.
Benefit of fixing the transmission is only $500.
Paying $600 to fix the transmission is not worthwhile.
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 Active Learning
Answers (cont’d)

Observations:
 The $1000 you previously spent on repairs is
irrelevant.
What matters is the cost and benefit of the marginal
repair (i.e., 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 and/or guardians 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
 Trade allows countries to
specialize in what they do best
and to enjoy a greater variety of
goods and services.
 Trade between two countries
can make each country better
off. For $5 a week you can watch baseball without
being nagged to cut the grass!

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 HOW PEOPLE INTERACT

Principle #6: Markets Are Usually a

Good Way to Organize Economic
Activity
 MARKET ECONOMY: an economy 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 (cont’d)
 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.

2. To intervene in the economy.

 Promote efficiency: Market failure
 Promote equity

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 HOW PEOPLE INTERACT

Principle #7: Governments Can

Sometimes Improve Market Outcomes
(cont’d)
 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.
 MARKET POWER: the ability of a single economic actor (or a small
group of actors)
to have a substantial influence on market prices.

1-2c
 Even when the outcomes are efficient, there can still be
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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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 Active Learning
Discussion Questions

For each of the following situations, what is the

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

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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.
 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,
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as measured by the production of goods and
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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

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