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11CHAPTER

D Y N A M I C P O W E R P O I N T S L I D E S B Y S O L I N A L I N D A H L

The Big IdeasThe Big Ideas

CHAPTER OUTLINE

10 Big Ideas in Economics:

1. Incentives Matter

2. Good Institutions align

Self-interest with theSocial interest

3. Trade-offs are

6. The importance ofWealth and Economicgrowth

7. Institutions matter8. Economic booms and

busts cannot be avoided

Everywhere

4. Thinking on the Margin

5. The Power of Trade

9. Prices rise when thegovernment prints toomuch money

10. Central banking is ahard job

To Try it!To Try it!questionsquestions

For applications, clickhereToTo

VideoVideo

Some good blogs and other sites to get the juices flowing:

Food for Thought.Food for Thought. Incentives in the PrisonerTransport Business

Only when the ship captains began to be paid perliving convict on arrival did the death rate fall fromover 33% to less than 1%

B A C K T OThe BritishThe British prison transport vessel Successprison transport vessel Succe ss

Big idea #1: Ince nt ives Ma tter

Incent ivesIncent ives::rewardsand penalties thatmotivate behavior.

B A C K T O

Peope respon toincentives inpredictable ways.

Self-interest is animportant incentive ineconomics.

Big idea #2: Good Institutions AlignSelf-interest with the Social Interest

Markets magically align your self-interest with social interest (usually)

B A C K T O

Because the cheese-monger wants profit;you get your cheese!

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SEE THEEE THE INVISIBLENVISIBLE HANDANDEE THEEE THE INVISIBLENVISIBLE HANDANDIt is not from the

benevolence of thebutcher, the brewer,

or the baker that we

Adam Smith saw the invisible hand

,

from their regard to

their own interest.-Adam Smith,

The Wealth of Nations

Big idea #3: Trad e- offs a re Eve rywh ere

Forevery choice something is gained,

something lost.

TheThe Opportuni ty CostOpportunity Cost of a choice: the

value of the opportunities lost.

B A C K T O

AND people respond to changes in

opportunity costs.

Unemployment rates and college enrollment:

related.

Big idea #4: Thinking o n the M argin

Actual trade-offs are usually onthe margin.

Marginal means additional

Most economic choices are

B A C K T O

E.G. Newt Gingrich wantedmandatory executions for drugdealers

but the effect was to reduce theEXTRA penalty for murdering

police offers during arrest

Higher punishmentsfor lesser crimesreduce themarginal cost ofharsher crimes.

Big idea #5:Big idea #5: ThePowerofTradeThePowerofTradeHans Rosling's famous lectures combine enormousquantities of public data with a sport's commentator's styleto reveal the story of the world's past, present and futuredevelopment. (4:48 minutes).

http://www.youtube.com/watch?v=jbkSRLYSojo

B A C K T O

Big idea #6:The Imp or tanc e of

Weal th and Ec onom ic Growth

Wealth brings higher standards of living.

Understanding economic growth iscrucial.

B A C K T O

SEE THEEE THE INVISIBLENVISIBLE HANDANDEE THEEE THE INVISIBLENVISIBLE HANDAND

WorldDistribution ofIncome,2000. Source:PennWorldTables

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Big idea #7: Institutions Ma tter

Why are som e c ountries rich a nd

othe rs p oo r?

Incentivesare sometimes lacking.

Strong institutio nsthat supp ort these

B A C K T O

incent ivesfoste r ec onom ic g rowth .

North andSouth

Can youtell which

night

betterinstitutions?

Big idea #8: Ec onom ic Boom s and BustsCannot Be Avo ided b ut Can Be Mo dera ted

Policymakers use Fiscal Policy andMonetary Policy to attempt to smoothout this economic volatility.

B A C K T O

Can we make theeconomy smoother?

Big idea #9:Pric es Rise Whe n the Go ve rnme nt

Prints Too Mu c h Mone y

Inflation is an increase in the general levelof prices.

Heavily indebted nations often printmoney to pay down debt.

B A C K T O

Brother ca n you spa re 10 mi ll ion Zim do l lars?

Big idea #10:Cen tra l Bank ingIs a Hard Job

The Federal Reserve is the U.S.s centralbank.

The Fed is in charge of money supplyHelping the economy be stable

B A C K T O

Preventing banking crises?

Ben Bernanke, Chairman of the Fed,wondering where the nearest aspirinsupply is.

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As land prices near the U.S. coastincrease, what changes do you expect

to see in burial practices (other thingsequal)? Think opportunity cost.

a) Traditional burials will increase andcremation will decrease.

b) Cremation will increase andtraditional burials will decrease.

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True or false: As womens wageshave risen over the past 50 years,the o ortunit cost of bein a sta -at-home mother has risen.

a) True

b) False

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Would you expect tofind companies

developing cures forrare diseases orcommon ones? Thinkabout incentives.

a) Rare diseases

b)Common diseases

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In which country would a person face alower opportunity cost for holding cash?

a) Zimbabwe

b) The U.S.

B A C K T O