Summary Mankiw

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| | |Microeconomics | |N. Gregory Mankiw | | | | | |Inga Oswald | |Semester I 2010/2011 |

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Part 1 - Introduction

Chapter 1 – The Principles of Economics

Scarcity = the limited nature of society's resources

Economics = the study of how society manages its scarce resources

• “Economy” is Greek for “managing a household”

HOW PEOPLE MAKE DECISIONS

1.People Face Tradeoffs
Making decisions requires trading off one goal against another. (Es geht um Kompromisse; man opfert eine Alternative um der anderen Willen)

A classic tradeoff is between “guns and butter” (military vs. living standard) • Leisure time vs. work
• Food vs. clothing
• Efficienty vs. equity
.
Efficiency = the property of society getting the most it can from its scarce resources.

Equity = the property of distributing economic prosperity fairly among the members of society.

When government tries to cut the economic pie into more equal slices, the pie gets smaller [Motivation der Oberschicht (weil sie weniger verdient) und der Unterschicht (weil sie sich weniger anstrengen muss) sinken]

2.The Cost of Something Is What You Give Up to Get It
Opportunity cost = Whatever must be given up to obtain some item.

← Decisions require comparing costs and benefits of alternatives.

Example: Decision making whether to go to university. Benefit: Intellectual enrichment and a lifetime of better job opportunities. Costs: tuition fees, books, room, but those costs would even apply if I would do something else… In this case the largest cost of university education is MY TIME.

3.Rational People Think at the Margin
Marginal changes= small incremental adjustments to a plan of action.

Example: When examinations roll around, your decision is not between completely failing them and studying 24/7, but whether to spend in extra hour revisiting your notes instead of watching TV. Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action. The `margin‘ means `edge‘, so marginal changes are adjustments around the edges of what you are doing.

By comparing marginal benefits and marginal costs, I can make a smart decision.

4.People Respond to Incentives
Any policy affects direct and indirect effects which must be analyzed [Menschen reagieren auf Anreize]

For example people respond on price increases with less consumption or they switch to a similar product (apple-peers)

HOW PEOPLE INTERACT

5.Trade Can Make Everyone Better Off
• Trade between two economies can make each economy better off. • Trade allows each person to specialize in the activities he or she does best • By trading with others, people...
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