Principles of How People Interact in Economics
Learn about the principles of how people interact in economics, including trade-offs, opportunity costs, and the benefits of trade and markets. Explore how trade can make everyone better off, why markets are a good way to organize economic activity, and the role of the invisible hand in promoting general economic well-being.
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Presentation Transcript
Ten Principles of Economics Objective: To name and explain principles of how people interact. Warm-Up 1) Give 3 examples of important trade-offs that you face in your life 2) What is the opportunity cost of seeing a movie? 3) Water is necessary for life. Is the marginal benefit of a glass of water large or small and why?
Group Task In your groups, your will be responsible for teaching the class about why people make decisions. Create a lesson on your whiteboards for the class and decide how you will teach your mini lesson. Examples: Key Ideas Provided Examples Your own real world examples or experiences
The principles of HOW PEOPLE INTERACT
HOW PEOPLE INTERACT Principle #5: Trade Can Make Everyone Better Off Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. Countries also benefit from trade & specialization: Get a better price abroad for goods they produce Buy other goods more cheaply from abroad than could be produced at home TEN PRINCIPLES OF ECONOMICS 4
HOW PEOPLE INTERACT Principle #6: Markets Are Usually A Good Way to Organize Economic Activity Market: a group of buyers and sellers (need not be in a single location) Organize economic activity means determining what goods to produce how to produce them how much of each to produce who gets them TEN PRINCIPLES OF ECONOMICS 5
HOW PEOPLE INTERACT Principle #6: Markets Are Usually A Good Way to Organize Economic Activity A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. Famous insight by Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if led by an invisible hand to promote general economic well-being. TEN PRINCIPLES OF ECONOMICS 6
HOW PEOPLE INTERACT Principle #6: Markets Are Usually A Good Way to Organize Economic Activity The invisible hand works through the price system: The interaction of buyers and sellers determines prices. Each price reflects the good s value to buyers and the cost of producing the good. Prices guide self-interested households and firms to make decisions that, in many cases, maximize society s economic well-being. TEN PRINCIPLES OF ECONOMICS 7
HOW PEOPLE INTERACT Principle #7: Governments Can Sometimes Improve Market Outcomes Important role for govt: enforce property rights (with police, courts) People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen. TEN PRINCIPLES OF ECONOMICS 8
HOW PEOPLE INTERACT Principle #7: Governments Can Sometimes Improve Market Outcomes Market failure:when the market fails to allocate society s resources efficiently Causes: Externalities, when the production or consumption of a good affects bystanders (e.g. pollution) Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly) TEN PRINCIPLES OF ECONOMICS In such cases, public policy may promote efficiency. 9
HOW PEOPLE INTERACT Principle #7: Governments Can Sometimes Improve Market Outcomes Govt may alter market outcome to promote equity If the market s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic pie is divided. TEN PRINCIPLES OF ECONOMICS 10
A C T I V E L E A R N I N G 2 Discussion Questions In each of the following situations, what is the government s role? Does the government s intervention improve the outcome? a.Public schools for K-12 b.Workplace safety regulations 11
