Ten Principles of Economics Power Point Slides prepared

Ten Principles of Economics Power. Point Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1

Overview • Self-introduction • Syllabus • Ten principles of Economics Three groups How People Make Decision (The first four) How People Interact (discussed later) How the Economy as a Whole Works (discussed in later chapters)

Self-Introduction • Xiaoyi Han (韩晓祎) • Now an assistant professor at WISE, Xiamen University (XMU) • Email: han. 293@osu. edu • Office: D 328, Economics Building • Office hour: Friday, 3: 00 pm -4: 30 pm • Research field: spatial econometrics, Bayesian econometrics

Self-Introduction (cont'd) • Hometown: Hainan Island, very south of China • Education: 2004 -2008, Zhejiang University, Hangzhou, China 2008 - 2014, Ph. D. in Economics, The Ohio State University (OSU), Columbus, OH, USA.

Two TAs • Xiaoyan Lan (蓝晓燕） • Tuesday, 2: 30 -4: 30 pm • 501358608@qq. com • Xing Zhou (周星） • Thursday, 4: 00 -6: 00 pm • 914398026@qq. com

Some comments on Syllabus • Textbook: Principle of Macroeconomics, N. Gregory Mankiw, 6 th edition, South. Western Cengage • If you buy used version of the textbook (the 5 th, or even the 4 th), it's fine. But pay attention to compare the chapters. • The course website is http: //hanxiaoyi. weebly. com/teaching. html All slides, practice questions, answers will be uploaded on the website.

Quizzes and exams • 6 Quizzes. Dates of Quizzes are listed in the syllabus • Your lowest quiz will be dropped. • 1 midterm • 1 final • Final is cumulative

Attendance Do I need to attend every lecture? (The class time is really bad. . . ) • The answer is: attendance accounts for 5% of your total grade • I will randomly check your attendance 4 times starting from the 3 rd lecture. • Each attendance earns 1. 25 points. • Three (3) or more unexcused absences will result in automatic failure for the course. This is the requirement of WISE • It is up to you to decide whether you should attend every lecture or not, my suggestion is • You need to attend the lecture with quizzes or exams, Otherwise you will lose your credit!!

Bonus from participation • Class participation is greatly encouraged • If you contribute to class discussion, you will receive 0. 5 point each lecture • Try to answer or ask questions, share your opinions, especially in English • Note that the maximum bonus points you can earn from class participation is 4.

What is Economics? • All economics questions rise when we want more than we can get – Our inability to satisfy all our wants is called scarcity. – Because we face scarcity(稀缺性), we must make choices. – Economics studies the choices that individuals, businesses, governments, and entire societies make and their interactions.

Ten Principles of Economics • Resources are scarce (Main Assumption) • Scarcity – The limited nature of individual or society’s resources • Economics – Study of how society manages its scarce resources (Macro) – Study of how individual make decisions given limited resources (Micro) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

How People Make Decisions Principle 1: People face trade-offs • Making decisions (choices) – Trade off one goal against another – Student – time – Parents – income – Society (government, firms) • National defense vs. consumer goods • Clean environment vs. high level of income • Fiscal cliff: Decrease budget deficit vs. economic growth © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14

How People Make Decisions Principle 2: The cost of something is what you give up to get it • People face trade-offs – Make decisions • Compare cost with benefits of alternatives • Opportunity cost (OC) – Whatever must be given up to obtain one item © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

Classical Example • The decision to go to college, think about the OC • You need to pay tuitions, books rooms. . • But what is the greatest cost? what do you give up to go to college? • Your time! if you don't go to college, you can work and might earn lots of money!

More on OC • OC emphasizes on the cost size. • Of course to choose something, you have to compare the cost with its benefit. • If the cost of doing A, mainly the OC, already outweigh the benefits of doing A • You should not choose A.

Lebron James' Decision

Enter NBA • Why did Lebron choose to enter NBA instead of going to college? • LBJ: compare the cost and benefit of going to College (OSU)? • Benefit: NCAA championship, or a bachelor's degree in economics? • What's the OC of going to college? • He would have given up all the potential years of NBA paycheck and all glories • The OC is too much campared with the benefits. • So he chose to enter NBA

To Miami (2010 Summer) • Why did Lebron James choose to bring his talent to the south beach instead of staying in Cleveland? • Compare the benefit and the cost of staying here • Staying: more glories, or a higher salary? • The OC of staying: he gave up a higher likelihood of championship • The OC of staying exceed the benefit

More on OC • Usually we will have several alternatives available when making decisions • Some textbook define OC as: the highest valued alternatives that must be given up • You choose A, have to give up two alternatives B and C; The value of B is larger than that of C; • The OC of doing A is B; • But we simpify the question: two options available.

Lebron James finally got his title! • Actually, we simplify the question because at that time he had many options: Cleveland, Miami, Chicago, NY. . . . • He believed the best alternative other than Cleveland is Miami.

It is not the end. . • 2014 Summer, he chooses to go home, go back to Cleveland! • Why did he choose Cleveland over Miami? • What is the OC of staying at Miami? • a larger likelihood of championship • a longer healthy career • a better reputation

How People Make Decisions Principle 3: Rational people think at the margin • Rational people (Strong Assumption) – Systematically & purposefully do the best they can to achieve their objectives • Marginal changes – Small incremental adjustments to a plan of action © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24

How People Make Decisions • Marginal benefits – Additional benefits • Marginal costs – Additional costs • Rational decision maker – Take action only if: – Marginal benefits > Marginal costs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25

Example • An airline wants to decide how much to charge passengers who fly standby • The average cost of flying a passenger is $500 • The plane is about to take off with 10 empty seats: • Should the airline sell the ticket at $300? • Yes! The additional cost of adding one more is tiny! • The additional benefit of adding one more is $300

More on MB and MC • Marginal cost is different from OC since they emphasize on different aspects. • However, in some settings, they might be related • A firm decides whether to hire a worker • MB: additional profit that the worker can bring, for example, $500; • MC: wage paid to the worker, say $300 • MB>MC; • OC of hiring the worker? • the firm could use $300 to buy other things(machine). $300 is the OC

How People Make Decisions Principle 4: People respond to incentives (a very general principle) • Incentive – Something (a reward or a punishment) that induces a person to act – Attendance – Higher price (iphone 6) • Buyers - consume less • Sellers - produce more – Public policy • Change costs or benefits • Change people’s behavior © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28

Examples • LBJ wants to bring his talent to the south beach because championship is an incentive for him • seat belt laws: seat belts give driver incentives to drive faster because they lower the likelihood of death in accidents. More accidents, increase in pedestrian death

Table 1 Ten Principles of Economics © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30