01 Ten Principles of Economics

Topics: Economics, Market failure, Cost Pages: 30 (1151 words) Published: December 6, 2014
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Principles of Economics, Third Edition
N. Gregory Mankiw
Prepared by Mark P. Karscig, Central Missouri State University.

1
INTRODUCTION

Ten Principles of
Economics

Copyright © 2004 South-Western/Thomson Learning

1

Economy. . .
. . . The word economy comes from a Greek
word for “one who manages a household.”

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TEN PRINCIPLES OF
ECONOMICS
• A household and an economy
face many decisions:
• Who will work?
• What goods and how many of them should be
produced?
• What resources should be used in production?
• At what price should the goods be sold?

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TEN PRINCIPLES OF
ECONOMICS
Society and Scarce Resources:
• 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.

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TEN PRINCIPLES OF
ECONOMICS
Economics is the study of how society manages
its scarce resources.

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TEN PRINCIPLES OF
ECONOMICS
• How people make decisions.





People face tradeoffs.
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.

Copyright © 2004 South-Western/Thomson Learning

TEN PRINCIPLES OF
ECONOMICS
• How people interact with each other.
• Trade can make everyone better off.
• Markets are usually a good way to organize
economic activity.
• Governments can sometimes improve economic
outcomes.

Copyright © 2004 South-Western/Thomson Learning

TEN PRINCIPLES OF
ECONOMICS
• The forces and trends that affect how the
economy as a whole works.
• The standard of living depends on a country’s
production.
• Prices rise when the government prints too much
money.
• Society faces a short-run tradeoff between inflation
and unemployment.

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Principle #1: People Face Tradeoffs.

“There is no such thing as a free lunch!”

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Principle #1: People Face Tradeoffs.
To get one thing, we usually have to give up
another thing.





Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity

Making decisions requires trading
off one goal against another.
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Principle #1: People Face Tradeoffs
• Efficiency v. Equity
• Efficiency means society gets the most that it can
from its scarce resources.
• Equity means the benefits of those resources are
distributed fairly among the members of society.

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Principle #2: The Cost of Something Is What
You Give Up to Get It.
• Decisions require comparing costs and benefits
of alternatives.
• Whether to go to college or to work?
• Whether to study or go out on a date?
• Whether to go to class or sleep in?

• The opportunity cost of an item is what you
give up to obtain that item.

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Principle #2: The Cost of Something Is What
You Give Up to Get It.
LA Laker basketball star
Kobe Bryant chose to
skip college and go
straight from high
school to the pros where
he has earned millions
of dollars.

Copyright © 2004 South-Western/Thomson Learning

Principle #3: Rational People Think at the
Margin.
• Marginal changes are small, incremental
adjustments to an existing plan of action.

People make decisions by comparing
costs and benefits at the margin.

Copyright © 2004 South-Western/Thomson Learning

Principle #4: People Respond to Incentives.
• Marginal changes in costs or benefits motivate
people to respond.
• The decision to choose one alternative over
another...
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