1. ECN 3100 PRINCIPLES OF ECONOMICS Group 2 Pn. Aimy bt Md. Yusof Monday Wednesday Friday 11 am DKEP2 Chapter 1

2. Semester 2 2005/2006 • Text book • Tests • T1 Week 5 (23/1/06) • T2 Week 10 (27/2/06) • Virtual class • Holidays: • 26/12/05 Monday • 2/1/06 Monday • 10/1/06 Tuesday • 29-30/1/06 Sunday-Monday Chapter 1

3. Economic Problems • What to produce? • How to produce? • For whom to produce? Scarce resources vs unlimited wants Chapter 1

4. Chapter 1: Ten Principles of Economics • Principle 1 – People face trade-offs. • Principle 2 – The cost of something is what you give up to get it. • Principle 3 – Rational people think at the margin. • Principle 4 – People respond to incentives. • Principle 5 – Trade makes everyone better off. • Principle 6 – Market economy is usually a good option. • Principle 7 – Government can sometimes help improve economy. • Principle 8 – Productivity determines the standard of living. • Principle 9 – Printing too much money increases prices. • Principle 10 – In the short-run, ↓Inflation causes ↑unemployment. Chapter 1

5. How People Make Decisions • “There is no such thing as a free lunch!” Principle 1: People face tradeoffs. • Making decisions requires trading off one goal against another (i.e. efficiency vs equity). Principle 2: The cost of something is what you give up to get it. • Even “free” things has hidden costs, i.e. the value of time (opportunity cost). Principle 3: Rational people think at the margin. • People make decisions by comparing costs and benefits at the margin. Principle 4: People respond to incentives. • The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! Chapter 1

6. How People Interact Principle 5: Trade can make everyone better off. • Trade allows specialization. • Competition results in gains from trading. Principle 6: Markets are usually a good way to organize economic activity. (Invisible Hands – Adam Smith 1776) • Households decide what to buy and who to work for. • Firms decide who to hire and what to produce. Principle 7: Governments can sometimes improve economic outcomes. • When the market fails (breaks down) due to externalities or market power, government can intervene to promote efficiency and equity. Chapter 1

7. How the Market Works Principle 8: The standard of living depends on a country’s production. • Standard of living may be measured in different ways such as by: • comparing personal incomes. • comparing the total market value of a nation’s production. Principle 9: Prices rise when the government prints too much money. • One cause of inflation is the growth in the quantity of money. Principle 10: Society faces a short-run tradeoff between inflation and unemployment. • The Phillips Curve illustrates the SHORT-RUN tradeoff between inflation and unemployment: ñUnemploymentð òInflation Chapter 1

8. Chapter 2: Thinking Like an Economist Chapter 1

9. Chapter 2: Thinking Like an Economist Two of the most basic economic models include: • The Circular Flow Diagram • Relationship between firms vs households. • The Production Possibilities Frontier • Shifts due to changes in technology & efficiency. Chapter 1