PowerPoint Presentations for

Principles of Macroeconomics
Eighth Canadian Edition [[add new text
by Mankiw/Kneebone/McKenzie 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
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 and
$5500 if it doesn’t work.

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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.

 Even when the outcomes are efficient, there can still be 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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 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, 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

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