Ten Principles of Economics

1 Ten Principles of Economics Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich

In this chapter, look for the answers to these questions: • What kinds of questions does economics address? 경제학은 어떤 종류의 질문에 대답하는가? • What are the principles of how people make decisions? 사람들이 어떻게 의사결정을 내리는지에 관한 기본원리는 무엇인가? • What are the principles of how people interact? 사람들이 어떻게 상호작용하는가에 관한 기본원리는 무엇인가? • What are the principles of how the economy as a whole works? 나라경제 전체가 어떻게 작동하는가에 관한 원리는 무엇인가? 1

What Economics Is All About 0 • Scarcity: the limited nature of society’s resources 희소성: 사회의 자원이 한정되어 있다는 속성 • Economics: the study of how society manages its scarce resources, e.g. 사회가 어떻게 희소한 자원을 관리하는가를 연구하는 학문 • how people decide what to buy, how much to work, save, and spend 무엇을 사고, 얼마나 일하고, 저축하고, 지출할 것인가를 사람들이(가계가) 어떻게 결정 • how firms decide how much to produce, how many workers to hire 얼마나 생산하고 얼마나 많은 근로자를 고용할 것인가를 기업이 어떻게 결정 • how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs 자원을 어떻게 나눌 것인가를 사회가 어떻게 결정 TEN PRINCIPLES OF ECONOMICS

The principles of HOW PEOPLE MAKE DECISIONS사람들은 어떻게 결정을 내리는가 0

HOW PEOPLE MAKE DECISIONS All decisions involve tradeoffs. 모든 결정은 맞교환을 포함 Examples: Going to a party the night before your midterm leaves less time for studying. 시험 전날 밤 파티에 가면 공부할 시간이 줄어든다. Having more money to buy stuff requires working longer hours, which leaves less time for leisure. 물건을 살 돈을 많이 가지려면 더 오래 일해야 하므로 여가시간이 줄어든다. Protecting the environment requires resources that could otherwise be used to produce consumer goods. 환경보호에는 자원이 필요한데 그 자원은 소비재 생산에도 쓸 수 있다. 0 Principle #1: People Face Tradeoffs 모든 선택에는 대가가 있다. TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS Society faces an important tradeoff: 사회가 직면하는 중요한 맞교환efficiency vs. equality Efficiency: when society gets the most from its scarce resources 효율성: 사회가 가지고 있는 희소한 자원으로부터 최대한을 얻는 것 Equality: when prosperity is distributed uniformly among society’s members 공평성: 사회의 번영이 구성원들에게 고르게 분배되는 것 Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. 공평성을 높이기 위해 부자로부터 가난한 사람에게로 소득을 재분배할 수 있다But this reduces incentive to work and produce, shrinks the size of the economic “pie.” 그런데 이는 근로 및 생산 의욕을 감소시켜 경제적 ‘파이’의 크기를 축소시킨다 0 Principle #1: People Face Tradeoffs TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS Making decisions requires comparing the costs and benefits of alternative choices. 결정을 하기 위해서는 다른 선택을 할 경우와 비용과 이득을 비교해야 한다. The opportunity cost of any item is whatever must be given up to obtain it. 어떤 것의 기회비용이란 그것을 얻기 위해 포기하는 다른 것이다. It is the relevant cost for decision making. 기회비용은 의사결정을 위해 적합한 비용이다. Principle #2: The Cost of Something Is What You Give Up to Get It 선택의 대가는그것을 얻기 위해 포기하는 그 무엇이다 TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS Examples:The opportunity cost of… …going to college for a year is not just the tuition, books, and fees, but also the foregone wages. 1년간 대학을 다니는 기회비용에는 등록금, 책값, 제요금 뿐만 아니라 포기한 임금도 포함 …seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater. 영화를 보는 기회비용은 티켓 가격 뿐만 아니라 영화관에서 보낸 시간의 가치도 포함 Principle #2: The Cost of Something Is What You Give Up to Get It TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS Rational people 합리적인 사람 systematically and purposefully do the best they can to achieve their objectives. 자신의 목표를 달성하기 위해 체계적이고 계획적으로 최선을 다한다 make decisions by evaluating costs and benefits of marginal changes– incremental adjustments to an existing plan. 한계적 변화의 이득과 비용을 비교하여 결정 - 기존의 행동계획을 조금씩 바꾸어 적응 Principle #3: Rational People Think at the Margin 합리적 판단은 한계적으로 이루어진다 TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS Examples: When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education. 학생이 대학을 1년 더 다닐지 말지 고려할 때 학비 및 포기한 임금과 1년 더 교육받아 벌 수 있는 추가소득을 비교 When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue. 관리자가 생산을 증가시킬지 말지 고려할 때 필요한 노동비용 및 재료비와 추가수입을 비교 Principle #3: Rational People Think at the Margin TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. 보상이나 처벌의 기대처럼 사람들이 행동을 하도록 만드는 것 Rational people respond to incentives. Examples: When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs. 휘발유 가격이 상승하면 소비자들은 하이브리드차를 더 많이 사고 휘발유를 많이 먹는 SUV를 적게 산다. When cigarette taxes increase, teen smoking falls. 담배세가 오르면 10대 흡연이 감소한다. Principle #4: People Respond to Incentives 사람들은 경제적 유인에 반응한다. TEN PRINCIPLES OF ECONOMICS

A C T I V E L E A R N I N G 1Applying the principles You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? Explain. A.Blue book value is $6500 if transmission works, $5700 if it doesn’t B.Blue book value is $6000 if transmission works, $5500 if it doesn’t 11

A C T I V E L E A R N I N G 1Answers Cost of fixing transmission = $600 A. Blue book value is $6500 if transmission works, $5700 if it doesn’t Benefit of fixing the transmission = $800($6500 – 5700). It’s worthwhile to have the transmission fixed. B. Blue book value is $6000 if transmission works, $5500 if it doesn’t Benefit of fixing the transmission is only $500. Paying $600 to fix transmission is not worthwhile. 12

A C T I V E L E A R N I N G 1Answers Observations: • The $1000 you previously spent on repairs is irrelevant. What matters is the cost and benefit of the marginal repair (the transmission). • The change in incentives from scenario A to scenario B caused your decision to change. 13

The principles of HOW PEOPLE INTERACT사람들은 서로 어떻게 상호작용하는가 0

HOW PEOPLE INTERACT Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. 사람들은 자급자족하는 대신 하나의 재화나 서비스 생산에 특화하여 그것을 다른 재화와 교환할 수 있다 Countries also benefit from trade & specialization: 국가도 특화와 교환을 통해 이득을 얻는다 Get a better price abroad for goods they produce 생산한 재화를 해외에서 더 좋은 가격에 판매한다 Buy other goods more cheaply from abroad than could be produced at home 다른 재화는 국내에서 생산할 때보다 더 저렴하게 해외에서 구매한다 Principle #5: Trade Can Make Everyone Better Off 자유거래는 모든 사람을 이롭게 한다 TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE INTERACT Market: a group of buyers and sellers 구매자와 판매자의 모임(need not be in a single location) 단일 장소일 필요는 없음 “Organize economic activity” means determining 경제활동을 조직한다는 것은 다음을 결정하다는 것을 의미 what goods to produce 어느 재화를 생산하느냐 how to produce them 어떻게 생산하느냐 how much of each to produce 각각 얼마나 생산하느냐 who gets them 생산된 것을 누가 가지느냐 Principle #6: Markets Are Usually A Good Way to Organize Economic Activity 시장은 경제활동을 조직하는 좋은 수단이다. TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE INTERACT A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. 수많은 기업과 가계가 시장에서 상호작용을 하는 가운데 분산된 의사결정에 의해 자원배분이 이루어지는 경제체제 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. 가계와 기업들은 각자 마치 ‘보이지 않는 손’에 이끌리듯이 행동하여 경제 전체의 후생을 증대시킨다 Principle #6: Markets Are Usually A Good Way to Organize Economic Activity TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE INTERACT The invisible hand works through the price system: 보이지 않는 손은 가격체계를 통해 작용 The interaction of buyers and sellers determines prices. 구매자들과 판매자들의 상호작용이 가격을 결정한다 Each price reflects the good’s value to buyers and the cost of producing the good. 각 가격은 구매자들에 대한 재화의 가치와 그 재화를 생산하는 비용을 반영한다 Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. 많은 경우 가격은 이기적인 가계와 기업이 사회의 경제적 후생을 최대화하는 결정을 내리도록 유도한다. Principle #6: Markets Are Usually A Good Way to Organize Economic Activity TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE INTERACT Important role for govt: enforce property rights(with police, courts) 정부의 중요한 역할 중 하나는 재산권을 보장하는 것 People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen. 재산을 도둑맞을 위험이 크다면 사람들은 일하고, 생산하고, 투자하거나 구매하려 하지 않는다. Principle #7: Governments Can Sometimes Improve Market Outcomes 경우에 따라 정부가 시장성과를 개선할 수 있다 TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE INTERACT Market failure: when the market fails to allocate society’s resources efficiently 시장실패: 시장이 효율적으로 자원을 배분하지 못하는 것 Causes: 원인 Externalities, when the production or consumption of a good affects bystanders (e.g. pollution) 외부효과: 어떤 재화의 생산이나 소비가 제3자에게 영향을 미치는 것 Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly) 시장지배력: 개별 구매자나 판매자가 시장가격에 큰 영향을 미칠 수 있는 능력 In such cases, public policy may promote efficiency. 그런 경우 공공정책은 효율성을 높일 수 있다 Principle #7: Governments Can Sometimes Improve Market Outcomes TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE INTERACT Govt may alter market outcome to promote equity정부는 공평성을 높이기 위해 시장의 결과를 바꿀 수도 있다 If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided. 만약 시장의 경제적 후생 분배가 바람직하지 못하면 세금 또는 복지정책이 경제적 ‘파이’가 분배되는 방식을 바꿀 수 있다 Principle #7: Governments Can Sometimes Improve Market Outcomes TEN PRINCIPLES OF ECONOMICS

A C T I V E L E A R N I N G 2Discussion 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 c.Public highways d.Patent laws, which allow drug companies to charge high prices for life-saving drugs 22

The principles of HOW THE ECONOMY AS A WHOLE WORKS 나라경제 전체는 어떻게 작동하는가 0

HOW THE ECONOMY AS A WHOLE WORKS Huge variation in living standards across countries and over time: 국가 간에또 시간이 흐름에 따라 생활수준의 엄청난 차이가 존재 Average income in rich countries is more than ten times average income in poor countries. 부국의 평균소득은 빈국의 평균소득의 열 배가 넘는다 The U.S. standard of living today is about eight times larger than 100 years ago. 오늘날 미국의 생활수준은 100년 전에 비해 약 8배 Principle #8: A country’s standard of living depends on its ability to produce goods & services. 한 나라의 생활수준은 그 나라의 생산능력에 달려 있다 TEN PRINCIPLES OF ECONOMICS

HOW THE ECONOMY AS A WHOLE WORKS The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor. 생활수준의 가장 중요한 결정요인은 생산성 – 한 단위 노동으로 만들어내는 재화와 서비스의 수량 Productivity depends on the equipment, skills, and technology available to workers. 생산성은 근로자가 사용가능한 장비, 숙련도, 기술에 의존 Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards. 생활수준에 대한 다른 요인들(가령, 노동조합, 외국과의 경쟁)의 영향은 훨씬 작음 Principle #8: A country’s standard of living depends on its ability to produce goods & services. TEN PRINCIPLES OF ECONOMICS

HOW THE ECONOMY AS A WHOLE WORKS Inflation: increases in the general level of prices. 인플레이션: 물가수준의 전반적인 상승 In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. 장기적으로 인플레이션은 거의 매번 통화량 증가에 기인하였고, 그로 인해 화폐 가치가 하락 The faster the govt creates money, the greater the inflation rate. 정부가 화폐를 빠르게 발행할수록 인플레이션율은 높아짐 Principle #9: Prices rise when the government prints too much money. 통화량이 지나치게 증가하면 물가는 상승한다 TEN PRINCIPLES OF ECONOMICS

HOW THE ECONOMY AS A WHOLE WORKS In the short-run (1 – 2 years), many economic policies push inflation and unemployment in opposite directions. 단기적으로는 많은 경제정책이 인플레이션과 실업을 반대 방향으로 움직이게 함 Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. 다른 요인들이 이런 상충관계를 다소간 유리하게 할 수도 있지만 상충관계는 항상 존재 Principle #10: Society faces a short-run tradeoff between inflation and unemployment 단기적으로는 인플레이션과 실업 사이에 상충관계가 있다 TEN PRINCIPLES OF ECONOMICS

FYI: How to Read Your Textbook 1.Read before class. You’ll get more out of class. 2.Summarize, don’t highlight. Highlighting is a passive activity that won’t improve your comprehension or retention. Instead, summarize each section in your own words. Then, compare your summary to the one at the end of the chapter. TEN PRINCIPLES OF ECONOMICS

FYI: How to Read Your Textbook 3. Test yourself.Try the “Quick Quiz” that follows each section before moving on to the next section. Write your answers down, compare them to the answers in the back of the book. If your answers are incorrect, review the section before moving on. 4.Practice, practice, practice. Work through the end-of-chapter review questions and problems. They are often good practice for the exams. And the more you use your new knowledge, the more solid it will become. TEN PRINCIPLES OF ECONOMICS

FYI: How to Read Your Textbook 5. Go online.The book comes with excellent web resources, including practice quizzes, tools to strengthen your graphing skills, helpful video clips, and other resources to help you learn the textbook material more easily and effectively. Visit:http://academic.cengage.com/economics/mankiw 6.Study in groups. Get together with a few classmates to review each chapter, quiz each other, and help each other understand the material. TEN PRINCIPLES OF ECONOMICS

FYI: How to Read Your Textbook 7.Teach someone. The best way to learn something is to teach it to someone else, such as a study partner or friend. 8. Don’t skip the real world examples.Read the Case Studies and “In The News” boxes in each chapter. They will help you see how the new terms, concepts, models, and graphs apply to the real world. As you read the newspaper or watch the evening news, see if you can find the connections with what you’re learning in the textbook. TEN PRINCIPLES OF ECONOMICS

CHAPTER SUMMARY The principles of decision making are: • People face tradeoffs. • The cost of any action is measured in terms of foregone opportunities. • Rational people make decisions by comparing marginal costs and marginal benefits. • People respond to incentives. 32

CHAPTER SUMMARY The principles of interactions among people are: • Trade can be mutually beneficial. • Markets are usually a good way of coordinating trade. • Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable. 33

CHAPTER SUMMARY The principles of the economy as a whole are: • Productivity is the ultimate source of living standards. • Money growth is the ultimate source of inflation. • Society faces a short-run tradeoff between inflation and unemployment. 34

Ten Principles of Economics