Notes on Principles of Economics

Pages: 21 (5438 words) Published: January 11, 2012
Book: Principles of Economics (N. Gregory Mankiw) Introduction

economy: Greek: the one who manages the household
scarcity: the limited nature of society`s resources
economics: the study of how society manages it´s scarce resources economy: a group of people interacting with one another as they go about their lives

important: management of society´s resources; resources are scare most societies, resources are allocated not by a single household, but through the combined action of millions of households and firms

( Economist: study how people make decisions: how much they must work; what they buy; how much they save; how they invest their savings, how people interact with each other; also analyze forces and trends that effect the economy as a whole, including the growth in average income and the rate at which prices are rising;

Ten Principles of Economics:

How people make decisions:

#1 People face tradeoffs
“There is no such thing as a free lunch.”
To get one desired thing, usually required giving up another desired thing: making decisions ( trading off one goal against another

e.g: How I spend my money (save/invest); The subject I want to study; The job I want to work in; The meal I am going to have; The place where I want to live or to study abroad …

classical tradeoffs:
“guns & butter”; (e.g. reducing pollution vs. low wages and high producing costs) “efficiency & equity” : conflicts when government policies are being designed

efficiency: the property of society getting the most it can from it`s scarce sources (size of economic pie) equity: the property of distributing economic prosperity fairly among the members of society (how the pie is divided)

#2 The cost of something is what you give up to get it
because people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of action; (often cost of some item not as obvious: e.g. all the incoming cost when decided to study: money & time)

opportunity cost: whatever must be given to obtain some item (How much do I have to give up = measure for the trade-off)

e.g. start a Master`s Course or not: alternatives (opportunity costs: working; work & travel; another Bachelor; Internship; (each decision causes new Costs. ( marginal costs?);

#3 Rational People think of the Margin
e.g. examination: not black & white: blow of vs: 24h studying ( decisions are shades of gray (airline) e.g. average cots of seat: $500, marginal cost: bag of peanuts & soda (e.g. $20)

marginal changes: small incremental (schrittweise, zunehmend) adjustments to a plan of action (adjustments around the edge of what you are doing)

e.g. thinking of the alternatives of not proceeding with a Master`s course (opp. Cost), but start to work directly after the B.A.: ( marginal costs: lower wage; less career possibilities; marginal benefits: a wage at all; BUT: only profitable when marginal benefit of the action exceeds the marginal costs

#4 People respond to incentives
although comparing costs & benefits (c & b) behaviour may change when costs or benefit change ( d.h. people respond to incentives effect of price on the behaviour of buyers & sellers is crucial e.g. price of an apple rises: buyer: decide to buy pears; fewer apples bec. cost of buying apple is higher; sellers: hire more workers & harvest more apples bec. benefit of selling one is higher e.g. policy changes: tax on gasoline: encourage people to drive smaller, more fuel-efficient cars or public transportation etc. ( when analyzing policy we must consider not only the direct effects but also the indirect effects that work through incentives (e.g seat belt law); if the policy changes incentives, it will cause people to alter their behaviour

e.g. when receiving an income parents (money) for studying it might change the incentive to work and earn own...
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