Ch.1+10+Principles+of+Economics

media type="youtube" key="VVp8UGjECt4" width="425" height="350" [|*The Ten Principles of Economics]

=What is ECONOMICS??=

Let's say you are the king of a country. All the decisions are up to you. YOU have to decide whether you want to spend money on military power, or on building roads. YOU have to decide whether everyone should get equal incomes, or should get the amount he or she worked for. YOU have to decide how much to tax people.

OR

Let's say you are the headmaster of a school. YOU have to decide what classes to offer. YOU have to decide what teachers to hire. YOU have to decide how much the school fee will be. YOU have to decide how much to spend on school facilities.

Is it easy?

Clearly not.

But why?

It's because there are so many choices, and you don't have infinite amount of money to get all of them. In other words, there are **limited resources** for unlimited wants. This is called **scarcity**. Scarcity means that we have limited resources for our unlimited wants. It is impossible to make everyone happy. This is where the study of economics becomes handy.


 * Economics** is the study of how to distribute the limited resources to satisfy the greedy people. The study of economics exists because of the scarcity of our resources. In other words, the study of economics exists because of our greediness. Our greediness conflicts with the limited resources, therefore we need to find a way to compromise each other :)

=Ten Principles of Economics=

TEN !

A little too overwhelming? Relax. It's just a preview.

However, you have a goal: **GET USED TO IT**.

We never use words like "Trade-offs" or "Opportunity Costs" in real life. Finding out the language of Economics and knowing the basic concept of it will greatly help you understand the upcoming chapters.

Before we start looking at the principles, know that we can divide these into two parts: Macroeconomics and Microeconomics. The first seven principles deal with microeconomics, and the last three deal with macroeconomics. "Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economy-wide phenomena." This will be elaborated in more detail in the next chapter.

(The Mankiw Textbook divides the principles into three parts.)

Now, Uno.

//Subtitle: iPhone VS Nintendo DS & Nintendo Wii//
Say you got accepted to Harvard, and your mom was so proud that she decided to buy you either an iPhone or a Nintendo DS & Wii. The price is about the same. Which will you choose? iPhone or Nintendo. Talk or Play.

VS & ([|iPhone]-Tech Digest, [|Nintendo DS]-Wii Users.Net, [|Nintendo Wii]-Megavoltage Blog)

You need to make a decision, a difficult one, too. When you decide, you are trading off either one against the other.

Now, let's look at a classic example of a trade-off, "guns and butter." If we decide to spend more money on guns (national defense), that would mean we would be spending less money on butter (consumer goods, such as education, public facilities, etc.). Another trade-off would be between efficiency and equity. **Efficiency** is making the society get its maximum profit from its scare resources. **Equity** is making the society allocate the resources to create a more balanced society. We can see this easily when the government taxes people. Government takes taxes from people and distribute them to the people who are economically in need. This reduces the maximum profit the society can earn but can actually save people from starving to death by allocating the resources. As Mankiw would put it, "when the government tries to cut the economic pie into more equal slices, the pie gets smaller." Though I would put it, "as more people come after the pie, you'll feel less satisfied."

Principle 2: The Cost of Something Is What You Give Up to Get It
//Subtitle: iPhone > Nintendo// OR iPhone < Nintendo

Let's come back to the happy Harvard guy example. When you decide, why would you stop for a second and think for a while what to choose? You don't want to regret your decision, and you're deciding which will satisfy you more. In this case, we might first look at the prices. iPhone costs about $900. Nintendo DS and Wii together cost about $700. If you were only looking at the prices, you would choose the iPhone right away because it is more beneficial to you; it will be the same as giving your mom the admission letter from Harvard and receiving $900 instead of $700. Of course, you should feel much better. Well, actually, we all know we have different perspectives on this mater. You might want the iPhone as your new cell phone as you move overseas from your international school. You also might want to have something to play with during the long summer break right before the semester starts. We have many different factors that affect our decisions in real life. However, in Economics, we mostly compare the numbers (prices), and these prices are mentioned as opportunity cost. The **opportunity cost** is something you give up to get the "something" you want.

= . . .= ([|Dollar]-ERA, [|Greater Symbol]-ETC, [|Question Mark]-Democracy Cell)

Now, if we look at this example, then, we can see that the opportunity cost for buying a iPhone is $700; the opportunity cost for buying a Nintendo is $900. In what decision are you giving up more? That's right, when you buy a Nintendo. So an economist would instead buy a iPhone because you would give up less in choosing that decision.

Principle 3: Rational People Think at the Margin
//Subtitle: Marginal Benefit > Marginal Cost ?//


 * Rational People**: people who systematically and purposefully do the best they can to achieve their objectives.

Normally, economists presume everybody's like this.

([|Rational Penguin]-Rational Understanding)

Or like This.

([|Rational People]-Rational Understanding)

There may be exceptions, however, such as other rational people who know that decisions in life have gray areas. In these gray areas, there are marginal changes. A good example would be leftover seats in an airplane. Right before the airplane leaves, if the airplane has leftover seats, you would notice the price of the tickets fall. This is because of the rational decisions people make looking at the marginal benefit and cost (marginal means small or tiny). When the marginal benefit is greater than the marginal cost, then, the rational people take action. In this case, the average cost of a flight includes the cost of expensive contents, such as oil. However, the marginal cost of a person is just some soda and peanuts. Since the marginal cost isn't that much, why wouldn't the plane accept another passenger that is willing to pay much more than the marginal costs. The marginal benefit is far greater than the marginal cost, thus showing that selling the ticket is profitable.

Principle 4: People Respond to Incentives
//Subtitle: Newton's Third Law: Action & Reaction//

([|Newton's Third Law]-Physics)

//Newton's Third Law: For every action, there is an equal and opposite reaction.//

Not exactly "equal" but incentives, or motives, make people respond. Say there was only vanilla flavor and chocolate flavor in supermarket close to my house, and I loved both, equally. If I were to buy an ice cream and saw that the vanilla ice cream became more expensive, I would buy the chocolate flavor, instead. This is what we call incentives and response (or Action & Reaction).

Principle 5: Trade Can Make Everyone Better Off
Can trade really make everyone better off? If my friend (say, Tom) and I both had farm and were producing tomatoes and potatoes, it would be better for one of us to specialize in one product and the other in the other product. Think of the efficiency of a person who makes both things at the same time or just focuses on one particular thing. Clearly, just focusing on one thing will be much more efficient. In order to make this efficiency, we do trades.

([|Really?]-NBA)

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Mice! (Price!) That's it. The modern economy system has its basis on the **market economy**. This economy holds many buyers and sellers, and these people interact for goods and services. In this economy, nothing manipulates it but the price. "Prices are the instruments," and as we go through the following chapters, you'll notice how important prices are. The incentives are the prices. When the price changes, always, look for something that changes because that is how this world of Economics works out.

Principle 7: Governments Can Sometimes Improve Market Outcomes
Now, I only said that today's economy is "based on" the market economy. The invisible hand exists, but like everything else in the world, it's not perfect. This is when the help of the government is needed. The most important work that the government accomplishes is giving **property rights** to every person. Because each person has a rather selfish mind set, no one would work if one wasn't guaranteed one's own property right. That is why there are Copyrights (though, this never works for music companies). Also, the government promotes efficiency and equity. To promote efficiency, the government watches over the market not to make the state of **market failure** (when market fails to allocate resources efficiently). There can be two possible reasons for this. One is **externality** (impact of one person's actions to the bystander, for example, pollution) and the other is **market power** (single person or group influencing on market prices). To promote equity, government takes taxes.

([|Invisible Hand]-Irish Election)

Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
GDP (Gross Domestic Product). What else? Right?

([|GDP]-Web.Mac)

If you check the graph, you can tell, right away, the relative economical situation between Korea and Syria. The productivity shows the living standards of varieties of countries. Productivity is calculated by multiplying the quantity of goods and worker's work time (P*Q).

Principle 9: Prices Rise When the Government Prints Too Much Money
([|Inflation]-Socal Bubble)

What is inflation?

Inflation is the increase in the overall prices in the economy.

Remember Germany?

Government's goal: Don't make too much money.

Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
The business cycle can be explained as the fluctuations in economic activity, which would surely affect inflation and unemployment.

The government can change inflation and unemployment by spending money on taxes or prints.

__**Key Concepts**__
 * scarcity**: saying that society has limited resources
 * economics**: study of how society manages its scarce resources
 * efficiency**: getting the most out of the scarce resources (cf. how big the cake is)
 * equity**: dividing the scarce resources fairly equally (cf. how many slices the cake is being cut)
 * opportunity** **cost**: something you have to give up in order to gain something
 * rational** **people**: people who think clearly, sensibly, and logically to achieve their best
 * marginal** **changes**: small changes to a plan
 * incentive**: something that motivates people to act
 * market** **economy**: a social system that distributes resources through the concept of supply and demand
 * property** **rights**: the right to have control over one's resources
 * market** **failure**: a situation when the allocation of resources are inefficient
 * externality**: the effects of a person's actions on a bystander
 * market** **power**: single power having great control on market prices
 * productivity**: the effectiveness of goods and services produced in terms of the rate of quantity per hour.
 * inflation**: increase in prices and decrease in the purchasing value of money
 * business cycle**: fluctuations in economic activity

__**Questions**__ 1. What are the trade-offs in this type of situation?
 * Jim and Carrey are deciding whehter to go to the movies or go play Dota-All-Stars at PC bang.

2. How can government intervention in the market be a good thing?

Answers Chapter 1 YD