Chapter1

TheBigIdeas
 Outline

Bigideasineconomics:
1. IncentivesMatter
g
2. GoodInstitutionsAlignSelfInterestwiththe
SocialInterest
3 Trade
3. Tradeoffs
offsAreEverywhere
Are Everywhere
4. ThinkingontheMargin
5 ThePowerofTrade
5. Th P fT d

2
 Outline
6. TheImportanceofWealthandEconomic
Growth
7. InstitutionsMatter
8 EconomicBoomsandBustsCannotBe
8. Economic Booms and Busts Cannot Be
AvoidedbutCanBeModerated
9. PricesRiseWhentheGovernmentPrints
h h
TooMuchMoney
10. CentralBankingIsaHardJob

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 The Big Ideas
TheBigIdeas
1.IncentivesMatter
Peoplerespondinpredictablewaystoincentives
ofallkinds.
Fame,power,reputation,sex,andloveareall
importantincentives.
po a ce es

4
 Definition

I
Incentives:
ti
Rewardsandpenaltiesthatmotivate
Rewards and penalties that motivate
behavior.

5
 The Big Ideas
TheBigIdeas

ANTONINASOTNYKOVA/SHUTTERSTOCK

Itisnotfromthebenevolenceofthebutcher,the
brewer,orthebaker,thatweexpectourdinner,but
fromtheirregardtotheirowninterest.
AdamSmith,TheWealthofNations
6
 Self Check
SelfCheck

Whichofthefollowingisanincentivetoreadyour
economicstext?

a. Thetitleofthebook.
b Thetimeittakesyoutoreadachapter.
b. The time it takes you to read a chapter
c. Bettergradesineconomics.

Answer: c better grades are the expected

reward for reading the text
text.
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 The Big Ideas
TheBigIdeas
2.GoodInstitutionsAlignSelfInterestwith
the Social Interest
theSocialInterest
Whenmarketsworkwell,individualspursuing
, p g
theirowninterestalsopromotesocialinterest.
Itisasifthemarketisledbyan
It is as if the market is led by an invisible
invisiblehand.
hand
Whenmarketsdonotworkwell,governmentcan
change incentives with taxes subsidies or
changeincentiveswithtaxes,subsidies,or
regulation.

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 The Big Ideas
TheBigIdeas
3.TradeoffsareEverywhere

MAXXSTUDIO/SHUTTERSTOCK

Example:drugtesting

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 The Big Ideas
TheBigIdeas
3.TradeoffsareEverywhere
Moretestingmeansthatapproveddrugswillhave
fewersideeffects.
Mustbalancethebenefitwithothertradeoffs:
Druglag:peopleareharmedwhenapprovalof
Drug lag: people are harmed when approval of
asafedrugisdelayed.
Drugloss:highertestingcostsmaymeanasafe
Drug loss higher testing costs may mean a safe
drugisneverdeveloped.

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 Definition

O
OpportunityCost:
t it C t
Theopportunitycostofachoiceisthe
The opportunity cost of a choice is the
valueoftheopportunitieslost.

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 Self Check
SelfCheck

Whatistheopportunitycostofreadingyour
economicstext?

a. Spendingtimewithfriendsorfamily.
b Thecostoftheeconomicstext.
b. The cost of the economics text
c. Bettergradesineconomics.

Answer: a reading the text means you have

less time to spend with friends or family
family.
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 The Big Ideas
TheBigIdeas
4.ThinkingontheMargin
Wemakechoicesbyconsideringthebenefitsand
costsofalittlemoreoralittleless.
Marginalmeansonemoreoroneless.
Marginalchoicesincludemarginalcost,marginal
Marginal choices include marginal cost marginal
revenue,andmarginaltaxrates.

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 The Big Ideas
TheBigIdeas
5.ThePowerofTrade
Thebenefitsoftradegobeyondthebenefitsfrom
exchange.
Tradeleadstoincreasedproductionthrough
spec a a o
specialization.
Italsoallowsustotakeadvantageofeconomiesof
scale.
scale
Theoryofcomparativeadvantage.

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 The Big Ideas
TheBigIdeas
6.TheImportanceofWealthandEconomic
Growth
Growth
Economicgrowthcreateswealth.
g
Wealthiereconomiesenablericherandhealthier
lives.
lives

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 Discussion Question
DiscussionQuestion

Thinkaboutthethingsyoudothroughoutyourday.
How many of them could you do in an
Howmanyofthemcouldyoudoinan
underdevelopedeconomywithnoservicesor
infrastructure? (No right or wrong answer )
infrastructure?(Norightorwronganswer.)

a. Allofthem.
All f th
b. Mostofthem.
c. Someofthem.
d. None of them.
Noneofthem.
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Image credit

GDP per capita and life satisfaction

GDPpercapitaandlifesatisfaction.
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 The Big Ideas
TheBigIdeas
7.InstitutionsMatter
Therightinstitutionsfostergrowth.
Includespropertyrights,politicalstability,honest
Includes property rights, political stability, honest
government,adependablelegalsystem,and
co pe
competitiveandopenmarkets.
e a d ope a es
Institutionsprovideincentivestosaveandinvestin
physical capital human capital innovation and
physicalcapital,humancapital,innovation,and
efficientorganization.

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 The Big Ideas
TheBigIdeas
8.EconomicBoomsandBustsCannotBe
Avoided but Can Be Moderated
AvoidedbutCanBeModerated
Economiesdonotgrowataconstantpace.
g p
Boomsandbustsareanormalresponseto
changing economic conditions
changingeconomicconditions.
Inadownturn,output(GDP)dropsand
unemployment increases
unemploymentincreases.

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 The Big Ideas
TheBigIdeas
8.EconomicBoomsandBustsCannotBe
Avoided but Can Be Moderated
AvoidedbutCanBeModerated
Thegovernmentcanusefiscalandmonetarypolicy
g yp y
toreducetheswingsinoutputand
unemployment.
p y
Ifusedimproperly,thesetoolscanmakethe
economy more volatile
economymorevolatile.

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 The Big Ideas
TheBigIdeas
9.PricesRiseWhentheGovernmentPrints
Too Much Money
TooMuchMoney
Acountryscentralbankregulatesthesupplyof
y g pp y
money.
Asustainedincreaseinthesupplyofmoney,
A sustained increase in the supply of money
withoutanincreaseinthesupplyofgoods,causes
prices to rise
pricestorise.

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 The Big Ideas
TheBigIdeas
9.PricesRiseWhentheGovernmentPrints
Too Much Money
TooMuchMoney
Inflationcanmakepeoplepoorer.
p p p
Unpredictableinflationmakesitharderforpeople
to figure out the real values of goods services and
tofigureouttherealvaluesofgoods,services,and
investments.
Excessiveinflationcanleadtoeconomic
Excessive inflation can lead to economic
disruption.

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 Definition

I fl ti
Inflation:
An increase in the general level of prices
Anincreaseinthegenerallevelofprices.

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 The Big Ideas
TheBigIdeas

APPHOTO

InZimbabweinearly2009,theinflationrateleapedto
billions of percent per month
billionsofpercentpermonth.
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 The Big Ideas
TheBigIdeas
10.CentralBankingisaHardJob
TheU.S.FederalReserve(TheFed)isoften
calledontocombatrecessions.
Theremaybealonglagbetweenadecisionand
theeffectsofthedecision.
e e ec s o e dec s o
Toomuchmoneyleadstoinflation.
Notenoughmoneycanleadtoeconomic
Not enough money can lead to economic
slowdownorrecession.

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 The Biggest Idea of All
TheBiggestIdeaofAll
EconomicsisFun
Economicsislinkedtoeverydaylife.
Seetheinvisiblehand,understandyourworld.
See the invisible hand, understand your world.

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 Takeaway

The
Thebasicprinciplesofeconomicsapplytoall
basic principles of economics apply to all
countries.
Economicsisalsolinkedtoeverydaylife
E i i l li k d t d lif your
job,personalfinances,debt,inflation,
recession.
i
Economicsteachesushowtomaketheworlda
betterplace.

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