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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 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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 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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TABLE 1.1
Ten Principles of Economics

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THE END

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