CHAPTE

DYNAMIC POWERPOINT SLIDES BY SOLINA LINDAHL

The Big Ideas

CHAPTER OUTLINE

To Try it!
questions

For applications, click here

To
Video

Food for
Thought.
Some good blogs and other sites to get the juices flowing:

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 33% to less than
1%

The British prison transport vessel Success

BACK TO

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.
BACK TO

Big idea #2: Good Institutions Align

Self-interest with the Social Interest

Markets magically align your

self-interest with social interest
(usually)
Because the cheesemonger wants profit;
you get your cheese!

BACK TO

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.
-Adam Smith,

The Wealth of Nations

Adam Smith saw the invisible

hand

Big idea #3: Trade-offs are

Everywhere
For every choice something is gained,
something lost.

The Opportunity Cost of a choice: the

value of the opportunities lost.
AND people respond to changes in
opportunity costs.
Unemployment rates and college enrollment:
related.

BACK TO

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
reduce the
marginal cost of
harsher crimes.
BACK TO

Big idea #5: The Power of Trade

Hans Rosling's famous lectures combine
enormous quantities of public data with a sport's
commentator's style to reveal the story of the
world's past, present and future development.
(4:48 minutes)
.

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

BACK TO

Big idea #6: The Importance of

Wealth and Economic Growth

Wealth brings higher standards of
living.
Understanding economic growth is
crucial.

BACK TO

SEE THE INVISIBLE

HAND

World Distribution of Income, 2000. Source:

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.

BACK TO

Can you
tell which
country
has better
institutions
?

North and
South
Korea at
night

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?

BACK TO

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.
Zimbabwe: highest inflation ever

Brother can you spare 10 million Zim dollars?

BACK TO

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.
BACK TO