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CHAPTER OUTLINE
10 Big Ideas in Economics:
1. 2. Incentives Matter Good Institutions align Self-interest with the Social interest Trade-offs are Everywhere Thinking on the Margin The Power of Trade 9. 7. 8. 6. The importance of Wealth and Economic growth Institutions matter Economic booms and busts cannot be avoided but can be moderated Prices rise when the government prints too much money

3. 4. 5.

DYNAMIC P OWERP OINT S LIDES BY S OLINA L INDAHL

10. Central banking is a hard job

To Try it! questions

CHAPTER

The Big Ideas

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Food for Thought.

Some good blogs and other sites to get the juices flowing:

Incentives in the Prisoner Transport Business

Only when the ship captains began to be paid per living convict on arrival did the death rate fall from over 33% to less than 1%

The British prison transport vessel Success Success

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Big idea #1: Incentives Matter Incentives: rewards Incentives: and penalties that motivate behavior.
People P l respond d to t incentives in predictable ways. Self-interest is an important incentive in economics.
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Big idea #2: Good Institutions Align Self-interest with the Social Interest

Markets magically align your selfinterest with social interest (usually)

Because the cheesemonger wants profit; you get your cheese!

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SEE THE INVISIBLE HAND

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, dinner but from their regard to their own interest.
-Adam Smith, The Wealth of Nations

Big idea #3: Trade-offs are Everywhere For every choice something is gained, something lost.

The Opportunity Cost of a choice: the value of the opportunities lost.

AND people respond to changes in opportunity costs. Unemployment rates and college enrollment: related.

Adam Smith saw the invisible hand

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Big idea #4: Thinking on the Margin

Actual trade-offs are usually on the margin. Marginal means additional Most economic choices are marginal choices E.G. Newt Gingrich wanted mandatory executions for drug dealers but the effect was to reduce the EXTRA penalty for murdering police offers during arrest

Big idea #5: ThePowerofTrade

Hans Rosling's famous lectures combine enormous quantities of public data with a sport's commentator's style to reveal the story of the world's past, present and future development. (4:48 minutes) .

Higher punishments for lesser crimes reduce the marginal cost of harsher crimes.
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http://www.youtube.com/watch?v=jbkSRLYSojo

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Big idea #6: The Importance of

Wealth and Economic Growth Wealth brings higher standards of living. Understanding economic growth is crucial.

SEE THE INVISIBLE HAND

WorldDistribution ofIncome, 2000.Source:PennWorld Tables

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Big idea #7: Institutions Matter Why are some countries rich and others poor?
Incentives are sometimes lacking.

Strong institutions that support these incentives foster economic growth.

Can you tell which country has better institutions?

North and South Korea at night

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Big idea #8: Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

Big idea #9: Prices Rise When the Government

Prints Too Much Money

Policymakers use Fiscal Policy and Monetary Policy to attempt to smooth out this economic volatility.

Inflation is an increase in the general level of prices. Heavily indebted nations often print money to pay down debt.
Zimbabwe: highest inflation ever

Can we make the economy smoother?

Brother can you spare 10 million Zim dollars?

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Big idea #10: Central Banking Is a Hard Job The Federal Reserve is the U.S.s central bank. The Fed is in charge of money supply
Helping the economy be stable Balancing inflation and unemployment Preventing banking crises?

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As land prices near the U.S. coast increase, what changes do you expect to see in burial practices (other things equal)? Think opportunity cost.
a) b) Traditional burials will increase and cremation will decrease. Cremation will increase and traditional burials will decrease.
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Ben Bernanke, Chairman of the Fed, wondering where the nearest aspirin supply is.

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True or false: As womens wages have risen over the past 50 years, the e opportunity oppo u y cost cos of o being be g a s stayay at-home mother has risen.
a) True b) False
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Would you expect to find companies developing cures for rare diseases or common ones? Think about incentives.
a) Rare diseases b) Common diseases
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In which country would a person face a lower opportunity cost for holding cash?
a) Zimbabwe b) The U.S.

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