PRINCIPLES OF ECONOMICS

Dr. Betul Bulut

[email protected]
Office: EK3-29

2024-2025
Fall
 What it is about?
 a comprehensive introduction to the field of economics,

Course
 tracing the historical development of economic thought,

 examining various economic actors and their behaviors,

Descri
 exploring different market structures,

 delving into key concepts in macroeconomics,

ption  understanding the factors contributing to the formation of

national income, and studying the role and functions of
money in the economy.

 a foundational understanding of economic principles that

are essential for informed decision-making and critical
thinking in both personal and professional contexts.
Course Objectives
At the end of the semester, you will have enhanced the following skills:

1. Understand the fundamental principles of economic life and

economic concepts used in daily life,

2. Impart an understanding of the rationality inherent in economic

processes,

3. Better comprehend economic phenomena,

4. Make more informed economic decisions, and enhance your ability

to think economically.
 The Textbooks of the Course

Principles of Principles of
Economics, Economics,
8th Edition, N. 10th Edition,
Gregory Case, Fair,
Mankiw Oster
The Textbooks of the Course

Ekonominin Dakikalar İçinde

Temelleri, Ekonomi,
William Boyes, Niall Kishtainy,
Michael Melvin Kronik Kitap
Nobel Akademik
Yayıncılık
Eylül, 2016
 1 Introduction and Basic Concepts

2 Supply and Demand 1

3 Supply and Demand 2

CONTENT of
4 The Economics of the Public Sector

the
5 Firm Behavior and The Organization of Industry

COURSE
6 The Economics of Labor Markets

7 The Data of Macroeconomics

 8 The Real Economy in the Long Run

9 Money and Prices in the Long Run

CONTENT of 10 The Macroeconomics of Open Economies

the 11 Short Run Economic Fluctuations

COURSE 12 Five Debates over Macroeconomic Policy

13 Economic Decision-Making and Personal Finance

ASSESSMENT AND EVALUATION

• Mid-term Exam  40%

• Final Exam  60%

WEEK 1  Introduction to Economics

 Basic Economic Concepts:

Resources, Scarcity, and Choice

Introduction and  Ten Principles of Economics

Basic Concepts  Thinking Like an Economist

What is Economics
The word economy comes from the Greek word oikonomos, which means “one who
manages a household.” At first, this origin might seem peculiar. But in fact, households
and economies have much in common.

A household faces many decisions. It must decide which household members do

which tasks and what each member receives in return:
• Who cooks dinner?
• Who does the laundry?
• Who gets the extra dessert at dinner?
• Who gets to drive the car?

A household must allocate its scarce resources (time, dessert, car mileage) among its
various members, taking into account each member’s abilities, efforts, and desires.
What is Economics
The management of society’s resources is
important because resources are scarce.

Scarcity means that society has limited

resources and therefore cannot produce all
the goods and services people wish to have.

Just as each member of a household cannot

get everything she wants, each individual in
a society cannot attain the highest standard
of living to which she might aspire.
What is Economics
 Economics is the study of how limited resources are allocated to satisfy unlimited wants and
needs of societies. In most societies, resources are allocated through the combined choices of
millions of households and firms.

 Economists study how people make decisions:

• how much they work,
• what they buy,
• how much they save,
• how they invest their savings,
• how they interact with one another (how the multitude of buyers and sellers of a good
together determine the price at which the good is sold and the quantity that is sold.)

 Economists analyze the forces and trends that affect the economy as a whole,
• the growth in average income,
• the fraction of the population that cannot find work,
• the rate at which prices are rising.
Three Basic Concepts of Economics

• Resources

• Scarcity

• Choice
 Resources
Resources are inputs used to produce goods and services.
Some resources are the products of nature: land, wildlife, fertile soil, minerals,
timber, energy, and even the rain and wind.

In addition, the resources available to an economy

include things such as buildings and equipment that
have been produced in the past but are now being used
to produce other things.

And perhaps the most important resource of a society is its human workforce with
people’s talents, skills, and knowledge.

Technology and enterpreneurial

ability…
Resources
Factors of production, factors  The basic Capital  Things that are produced and
resources available to a society are often then used in the production of other goods
referred to as factors of production, or simply and services are called capital resources.
factors.
 Buildings
 Land,  Equipment
 Labor  Desks
 Capital  Chairs
 Software
The process that transforms scarce resources
into useful goods and services is called
 Roads
production. In many societies, most of the  Bridges
production of goods and services is done by  Highways
private firms.
Scarcity and Choice
Scarcity is the fundamental problem in economics because resources are limited, but
wants and needs are unlimited.

Scarcity means that society has limited resources and therefore cannot produce all the
goods and services people wish to have.

Whether you're an individual, a business, or a government, you constantly make

constrained choices about how to allocate resources.

Just as each member of a household cannot get everything she wants, each individual in a
society cannot attain the highest standard of living to which she might aspire.
Fundamental Economic Problems
Every society has a system or process that works to transform the resources that nature and previous
generations provide into useful form. Economics is the study of that process and its outcomes.

Inputs Outputs
 Ten Principles of Economics
1- How People Make Decisions? 2- How People Interact?
Principle 1: People Face Trade-offs Principle 5: Trade Can Make Everyone Better Off

Principle 2: The Cost of Something Is What You Give Up Principle 6: Markets Are Usually a Good Way to
to Get It Organize Economic Activity

Principle 3: Rational People Think at the Margin Principle 7: Governments Can Sometimes
Improve Market Outcomes
Principle 4: People Respond to Incentives

3- How the Economy as a Whole Works?

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

Principle 9: Prices Rise When the Government Prints Too Much Money

Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
Ten Principles of Economics
1- How People Make Decisions?

Principle 1: People Face Trade-offs

Principle 2: The Cost of Something Is What You Give Up to Get It

Principle 3: Rational People Think at the Margin

Principle 4: People Respond to Incentives

P1: People Face Trade-offs
To get something that we like, we have to give up something else that we also like

– Going to a party the night before an exam

• Less time for studying
– Having more money to buy stuff
• Working longer hours, less time for leisure
– Protecting the environment
• Resources could be used to produce consumer goods
P1: People Face Trade-offs
Society faces trade-offs:

– The more it spends on national defense (guns) to protect its shores

• The less it can spend on consumer goods (butter) to raise the standard
of living at home

– Pollution regulations: cleaner environment and improved health

• But at the cost of reducing the incomes of the firms’ owners, workers,
and customers
P1: People Face Trade-offs

Efficiency: society gets the most from its scarce

resources

Equality: prosperity is distributed uniformly

among society’s members

Tradeoff:
– To achieve greater equality, could redistribute income from wealthy to poor
– But this reduces incentive to work and produce, shrinks the size of economic “pie”
P2: The Cost of Something Is What
You Give Up to Get It
Making decisions:
– Compare costs with benefits of alternatives
– Need to include opportunity costs

Opportunity cost
– Whatever must be given up to obtain some item
P2: The Cost of Something Is What
You Give Up to Get It
The opportunity cost of:
– Going to college for a year
• Tuition, books, and fees
• PLUS foregone wages
– Going to the movies
• The price of the movie ticket
• PLUS the value of the time you spend in the theater
P2: The Cost of Something Is What
You Give Up to Get It
 P3: Rational People Think at the
Margin
Rational People (Decision Makers); We weigh costs and benefits;
– Systematically and purposefully do - What are the costs of attending class
the best they can to achieve their today?
objectives - Tuition?
– Given the available opportunities - Sunk cost – has already been
incurred and can’t be recovered
– Make decisions by evaluating costs - What are the benefits of attending
and benefits of marginal changes class today?
• Small incremental adjustments
to a plan of action
 P3: Rational People Think at the
Margin
Examples: The Economic Decision Rule:
– Cell phone users with unlimited minutes - If the marginal (incremental)
(the minutes are free at the margin) benefit (MB) of an action exceeds
• Are often prone to making
the marginal (incremental) cost
long/frivolous calls (MC), do it.
• Marginal benefit of the call > 0
- If the MC > MB, don't do it.

– A manager considers whether to increase - We do things to the point where:

output MB=MC
• Compares the cost of the needed labor
and materials to the extra revenue
P4: People Respond to Incentives

Incentive
– Something that induces a person to act

Examples:
– When gas prices rise, consumers buy more hybrid cars and
fewer gas guzzling SUVs
– When cigarette taxes increase,
teen smoking falls
 When deciding
whether or not
you will attend
your Principles of
Economics
class which of
the following is
NOT one of the
costs that you
should consider?
Active Learning 2 Applying the principles

You are selling your 2007 Mustang.

You have already spent $1,000 on repairs. At the last minute, the transmission
dies. You can pay $900 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 (what you could get for the car) is $7,500 if
transmission works, $6,200 if it doesn’t.
B. Blue book value is $6,300 if transmission works, $5,500 if it doesn’t.
Active Learning 2 Applying the principles

Cost of fixing the transmission = $900

A. Blue book value is $7,500 if transmission works, $6,200 if it doesn’t
– Benefit of fixing transmission = $1,300
(= 7500 – 6200)
– Get the transmission fixed

B. Blue book value is $6,300 if transmission works, $5,500 if it doesn’t

– Benefit of fixing the transmission = $800
(= 6300 – 5500)
– Do not pay $900 to fix it
Ten Principles of Economics
2- How People Interact?

Principle 5: Trade Can Make Everyone Better Off

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

Principle 7: Governments Can Sometimes Improve Market Outcomes

P5: Trade Can Make Everyone
Better Off
People benefit from trade:
– People can buy a greater variety of goods and services at
lower cost

Countries benefit from trade and specialization

– Get a better price abroad for goods they produce
– Buy other goods more cheaply from abroad than could be
produced at home
 P6: Markets Are Usually a Good Way
to Organize Economic Activity
Market A market economy allocates resources
– A group of buyers and sellers (need not be – Decentralized decisions of many
in a single location) firms and households – as they
interact in markets
“Organize economic activity” means determining Famous insight by Adam Smith in The
– What goods and services to produce Wealth of Nations (1776):
– How much of each to produce – Each of these households and
firms acts as if “led by an invisible
– Who produced and consumed these hand” to promote general
economic well-being
P6: Markets Are Usually a Good Way
to Organize Economic Activity
Prices:
– Determined:
interaction of
buyers and sellers

– Reflect the good’s

value to buyers

– Reflect the cost of

producing the good
P7: Governments Can Sometimes
Improve Market Outcomes
Government - enforce property rights
– Enforce rules and maintain institutions that are key to a
market economy
• People are less inclined to work, produce, invest, or
purchase if large risk of their property being stolen
P7: Governments Can Sometimes
Improve Market Outcomes
Government - promote efficiency
– Avoid market failures: market left on its own fails to allocate
resources efficiently
– Externality – source of market failure
• Production or consumption of a good affects bystanders
(e.g. pollution)
– Market power – source of market failure
• A single buyer or seller has substantial influence on
market price (e.g. monopoly)
P7: Governments Can Sometimes
Improve Market Outcomes
Government - promote equality
– Avoid disparities in economic wellbeing
– Use tax or welfare policies to change how the economic “pie”
is divided
Active Learning 3 Discussion Question

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
Ten Principles of Economics
3- How the Economy as a Whole Works?

Principle 8: A Country’s Standard of Living Depends on Its Ability to

Produce Goods and Services

Principle 9: Prices Rise When the Government Prints Too Much Money

Principle 10: Society Faces a Short-Run Trade-off between Inflation and

Unemployment
P8: A Country’s Standard of Living
Depends on Its Ability to Produce
Goods and Services
Huge variation in living standards
– Across countries and over time

– Average income in rich countries

• Is more than 10 times average income in poor countries

– The U.S. standard of living today

• Is about 8 times larger than 100 years ago
P8: A Country’s Standard of Living
Depends on Its Ability to Produce
Goods and Services
Productivity: most important determinant of living standards
– Quantity of goods and services produced from each unit of
labor input

– Depends on the equipment, skills, and technology available

to workers
• Other factors (e.g., labor unions, competition from
abroad) have far less impact on living standards
P9: Prices Rise When the
Government Prints Too Much Money
Inflation
– An increase in the overall level of prices in the economy

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
– The faster the government creates money,
the greater the inflation rate
P10: Society Faces a Short-run Trade-off
between Inflation and Unemployment

Short-run trade-off between unemployment and inflation

– Over a period of a year or two, many economic policies push
inflation and unemployment in opposite directions

– Other factors can make this tradeoff more or less favorable,

but the tradeoff is always present
Summary
Fundamental lessons about individual decision making:

• People face trade-offs among alternative goals

• The cost of any action is measured in terms of forgone
opportunities
• Rational people make decisions by comparing marginal costs
and marginal benefits
• People change their behavior in response to the incentives
they face
Summary
Fundamental lessons about interactions among people:

• Trade and interdependence can be mutually beneficial

• Markets are usually a good way of coordinating economic activity
among people
• The government can potentially improve market outcomes by
remedying a market failure or by promoting greater economic
equality
Summary
Fundamental lessons about the economy as a whole:

• Productivity is the ultimate source of living standards

• Growth in the quantity of money is the ultimate source of
inflation
• Society faces a short-run trade-off between inflation and
unemployment
 2
THINKING LIKE AN ECONOMIST
Thinking Like an Economist

Theory Model
Development

Data
Observation
Collection

"Science is nothing but refined thinking." Albert Einstein

Thinking Like an Economist
Assumption:
The art in scientific thinking, whether it's in physics, biology, or economics, is
the ability to decide which assumptions to make.

For example, to study the effects of international trade, we can assume that
the world consists of only two countries, and each country produces only two
goods.

By understanding international trade in this simplified imaginary world, we

are better equipped to understand international trade in the more complex
world we actually live in.
Thinking Like an Economist
Economic Models:
Just as biology teachers use plastic replicas of the human body to teach
anatomy, economists use models to understand the world, but unlike
plastic mannequins, models are typically made up of diagrams and
equations.

All models are constructed based on assumptions.

Thinking Like an Economist
Two Basic Economic Models:
1- Circular Flow Diagram

A model that visually represents the flow of money between households

and businesses.

2- Production Possibility Frontier (PPF)

A graph that shows the possible output combinations an economy can

produce, taking into account its current production factors and
technology.
Circular Flow Diagram
Production Possibility Frontier (PPF)
Production Possibility Frontier (PPF)
Production possibilities curve indicates the mutual relationship between the production outputs
of different goods, and this mutual relationship can change over time.
Thinking Like an Economist
The Scope of Economics:

1- Microeconomics

Examines how households and firms make decisions and interact in the
market.

2- Macroeconomics

It analyzes economy-wide events such as inflation, unemployment, and

economic growth.
Thinking Like an Economist

Economists are scientists when they try to explain the world, and they
become policy advisors when they aim to improve it.

Ali: Minimum wage laws cause unemployment.  Positive Statements

Claims that attempt to describe the world as it is.

Zeynep: The government should raise the minimum wage. Normative

Statements
Claims that attempt to determine how the world should be.