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Ten Principles of Economics

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Ten Principles of Economics
CHAPTER

1

In this chapter, look for the answers to these 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?

Ten Principles of Economics

Macroeconomics
N. Gregory Mankiw
Premium PowerPoint Slides by Ron Cronovich
© 2009 South-Western, a part of Cengage Learning, all rights reserved

PRINCIPLES OF

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.
TEN PRINCIPLES OF ECONOMICS
4

HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
Society faces an important tradeoff: efficiency vs. equality Efficiency: when society gets the most from its scarce resources Equality: when 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 the economic “pie.”
TEN PRINCIPLES OF ECONOMICS
5

1

6/7/2010

HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is What You Give Up to Get It
Making decisions requires comparing the costs

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