Download The big ideas

The Big Ideas
Chapter 1
1 PRINCIPLES: MACROECONOMICS COWEN AND TABARROK
© 2010 WORTH PUBLISHERS MODERN
Incentives in the Prisoner Transport
Business
Only when the ship
captains began to
be paid per living
convict on arrival
did the death rate
fall from over 1/3 to
less than 1%.
British prison transport vessel
2
“Success”. Source: public domain
Chapter Outline
• Big Ideas in Economics:
1.
2.
3.
4.
5.
6.
7.
8.
Incentives Matter
Good Institutions align Self-interest with the Social interest
Trade-offs are Everywhere
Thinking on the Margin
Tampering with the Laws of Supply and Demand has Consequences
The importance of wealth and economic growth
Institutions matter
Economic booms and busts cannot be avoided but can be
moderated
9. Prices rise when the government prints too much money
10.Central banking is a hard job
• The Biggest Idea of All: Economics is Fun
• See the Invisible Hand Blog (click) for more examples.
3
Big idea #1: Incentives Matter
• Incentives: rewards and
penalties that motivate
behavior.
• People respond to incentives
in predictable ways.
• Self-interest is an important
incentive in economics.
4
Big idea #2: Good institutions align selfinterest with the social interest
• Markets magically align your selfinterest with social interest (usually).
Because the cheesemonger wants profit,
you get your cheese!
5
SEE THE INVISIBLE HAND
“It is not from the
benevolence of the
butcher, the brewer, or
the baker that we
expect our dinner, but
from their regard to
their own interest.” The
Wealth of Nations Adam Smith
Adam Smith saw the
invisible hand.
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Big idea #3: Trade-offs Are Everywhere
• For every choice something is gained,
something lost.
• The Opportunity Cost of a choice is the
value of the opportunities lost. (key
concept)
– AND people respond to changes in opportunity
costs.
– Unemployment rates and college enrollment:
related.
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Big idea #4: Thinking on the Margin
Actual trade-offs are usually “on the
margin.”
• Marginal means additional.
• Most economic choices are
marginal choices.
• E.g. Newt Gingrich wanted
mandatory executions for drug
dealers…
• … but the effect was to reduce the
EXTRA penalty for murdering
police offers during arrest.
higher punishments
for lesser crimes
reduces the marginal
cost of harsher
crimes
8
Big idea #5: Tampering with the Laws of
Supply and Demand Has Consequences
• Roman Emperor Diocletian
set a maximum price on
beef, eggs, grain and
clothing on pain of death.
– Result? No one sold much…
The shortages were severe and
the policy was abandoned.
– U.S. President Nixon repeated
the price controls in 1971 as oil
prices rose- and then
abandoned them.
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Big idea #6: The Importance of Wealth and
Economic Growth
• Wealth brings higher standards of
living.
• Understanding economic growth is
crucial.
10
World Distribution of Income, 2000. Source: Penn World Tables
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Big idea #7: Institutions Matter
• Why are some countries rich and
others poor?
• Incentives are sometimes lacking.
• Strong institutions that support these
incentives foster economic growth.
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SEE THE INVISIBLE HAND
Can you
tell which
country has
better
institutions?
North and
South
Korea at
night
13
Big idea #8: Economic Booms and Busts
Cannot Be Avoided but Can Be Moderated
• Policymakers use
Fiscal Policy and
Monetary Policy to
attempt to smooth
out this economic
volatility.
Can we make the
economy smoother?
14
Big idea #9: Prices Rise When the
Government Prints Too Much Money
• Inflation is an increase
in the general level of
prices.
• Heavily indebted
nations often print
money to pay down
debt…
Brother can you spare
10 million Zim dollars?
– Zimbabwe: highest inflation
ever
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Big idea #10: Central Banking Is a Hard
Job
• The Federal Reserve is
the U.S.’s central bank.
• “The Fed” is in charge
of money supply.
– Helping the economy be
stable
– Balancing inflation and
unemployment
– Preventing banking crises?
Ben Bernanke, Chairman of
the Fed, wondering where
the nearest aspirin supply is.
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Try it!
As land prices near the U.S. coast
increase, what changes do you expect
to see in burial practices (other things
equal)? Think opportunity cost.
a)
b)
Traditional burials will increase and
cremation will decrease.
Cremation will increase and traditional
burials will decrease.
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Try it!
As land prices near the U.S. coast
increase, what changes do you expect
to see in burial practices (other things
equal)? Think opportunity cost.
a)
b)
Traditional burials will increase and
cremation will decrease.
Cremation will increase and traditional
burials will decrease.
18
Try it!
True or false: As women’s wages
have risen over the past 50 years,
the opportunity cost of being a stayat-home mother has risen.
a) True
b) False
19
Try it!
True or false: As women’s wages
have risen over the past 50 years,
the opportunity cost of being a stayat-home mother has risen.
a) True
b) False
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Try it!
Would you expect to
find companies
developing cures for
rare diseases or
common ones? Think
about incentives.
a) Rare diseases
b) Common diseases
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Try it!
Would you expect to
find companies
developing cures for
rare diseases or
common ones? Think
about incentives.
a) Rare diseases
b) Common diseases
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Try it!
In which country
would a person face
a lower opportunity
cost for holding
cash?
a) Zimbabwe
b) The U.S.
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Try it!
In which country
would a person face a
lower opportunity cost
for holding cash?
a) Zimbabwe
b) The U.S.
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