Ten Principles of Economics: Icroeonomics

CHAPTER
Ten Principles of Economics
Microeonomics
PRINCIPLES OF
N. Gregory Mankiw
© 2009 South-Western, a part of Cengage Learning, all rights reserved

Some key questions
 What kinds of questions does economics address?

 What are the principles of how people make
decisions?
 What are the principles of how people interact?
 What are the principles of how the economy as a
whole works?
1
What Economics Is All About
 Scarcity: the limited nature of society’s
resources
 Economics: the study of how society manages
its scarce resources, e.g.
 how people decide what to buy,
how much to work, save, and spend
 how firms decide how much to produce,
how many workers to hire
 how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
TEN PRINCIPLES OF ECONOMICS 2

The principles of
HOW PEOPLE
MAKE DECISIONS
HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
All decisions involve tradeoffs. Examples:

 Going to a party the night before your midterm
leaves less time for studying.
 Having more money to buy stuff requires working
longer hours, which leaves less time for leisure.
 Protecting the environment requires resources
that could otherwise be used to produce
consumer goods.

Principle #2: The Cost of Something Is
What You Give Up to Get It
 Making decisions requires comparing the costs
and benefits of alternative choices.
 The opportunity cost of any item is
whatever must be given up to obtain it.
 It is the relevant cost for decision making.

Principle #2: The Cost of Something Is
What You Give Up to Get It
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.

Principle #3: Rational People Think at the
Margin
Rational people
 Always act in their best interest
 make decisions by evaluating costs and benefits
of marginal changes – incremental adjustments

Principle #3: Rational People Think at the
Margin
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.
 When a manager considers whether to increase
output, she compares the cost of the needed
labor and materials to the extra revenue.

Principle #4: People Respond to Incentives
 Incentive: something that induces a person to
act, i.e. the prospect of a reward or punishment.
 Rational people respond to incentives.
Examples:
 When gas prices rise, consumers buy more
hybrid cars and fewer gas guzzling SUVs.
 When cigarette taxes increase,
teen smoking falls.

The principles of
HOW PEOPLE
INTERACT
HOW PEOPLE INTERACT
Principle #5: Trade Can Make Everyone
Better Off
 Rather than being self-sufficient,
people can specialize in producing one good or
service and exchange it for other goods.
 Countries also benefit from trade & specialization:
 Get a better price abroad for goods they produce
 Buy other goods more cheaply from abroad than
could be produced at home

HOW PEOPLE INTERACT
Principle #6: Markets Are Usually A Good Way
to Organize Economic Activity
 Market: a group of buyers and sellers

(need not be in a single location)
 “Organize economic activity” means determining
 what goods to produce
 how to produce them
 how much of each to produce
 who gets them

HOW PEOPLE INTERACT
 A market economy allocates resources through

the decisions of many households and firms as
they interact in markets.
 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.

HOW PEOPLE INTERACT
 The invisible hand works through the price system:
 The interaction of buyers and sellers
determines prices.
 Each price reflects the good’s value to buyers
and the cost of producing the good.

HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes
Improve Market Outcomes
 Market failure: when the market fails to allocate
society’s resources efficiently
 In such cases, public policy may promote efficiency.

HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes
Improve Market Outcomes
 Govt may alter market outcome to promote equity

 If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can change
how the economic “pie” is divided.

The principles of
HOW THE
ECONOMY
AS A WHOLE
WORKS
HOW THE ECONOMY AS A WHOLE WORKS
Principle #8: A country’s standard of living
depends on its ability to produce goods &
services.
 The most important determinant of living standards:
productivity, the amount of goods and services
produced per unit of labor.
 Productivity depends on the equipment, skills, and
technology available to workers.

Principle #9: Prices rise when the
government prints too much money.
 Inflation: increases in the general level of prices.

 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 govt creates money,
the greater the inflation rate.

Principle #10: Society faces a short-run
tradeoff between inflation and unemployment
 In the short-run (1 – 2 years),
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.

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.
21
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.
22
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.
23

Ten Principles of Economics: Icroeonomics

Uploaded by

Document Informationclick to expand document information10 principles of economics

Document Informationclick to expand document information

Copyright:

Available Formats

Ten Principles of Economics: Icroeonomics

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ten Principles of Economics: Icroeonomics

Uploaded by

Copyright:

Available Formats

CHAPTER

Ten Principles of Economics

© 2009 South-Western, a part of Cengage Learning, all rights reserved

 What kinds of questions does economics address?

TEN PRINCIPLES OF ECONOMICS 2

All decisions involve tradeoffs. Examples:

TEN PRINCIPLES OF ECONOMICS 4

TEN PRINCIPLES OF ECONOMICS 5

TEN PRINCIPLES OF ECONOMICS 6

TEN PRINCIPLES OF ECONOMICS 7

TEN PRINCIPLES OF ECONOMICS 8

TEN PRINCIPLES OF ECONOMICS 9

TEN PRINCIPLES OF ECONOMICS 11

 Market: a group of buyers and sellers

TEN PRINCIPLES OF ECONOMICS 12

 A market economy allocates resources through

TEN PRINCIPLES OF ECONOMICS 13

TEN PRINCIPLES OF ECONOMICS 14

TEN PRINCIPLES OF ECONOMICS 15

 Govt may alter market outcome to promote equity

TEN PRINCIPLES OF ECONOMICS 16

TEN PRINCIPLES OF ECONOMICS 18

 Inflation: increases in the general level of prices.

TEN PRINCIPLES OF ECONOMICS 19

TEN PRINCIPLES OF ECONOMICS 20

The principles of decision making are:

The principles of interactions among people are:

The principles of the economy as a whole are:

You might also like