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A Lecture Presentation in PowerPoint
to Accompany
Ten Principles of
Principles of Economics Economics
Second Edition
by by Greg Mankiw
N. Gregory Mankiw Chapter 1
Copyright © by Harcourt, Inc.
All rights reserved. Requests for permission to make copies of any part of the
Prepared by Mark P. Karscig, Department of Economics & work should be mailed to:
Permissions Department, Harcourt College Publishers,
Finance, Central Missouri State University. 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
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Economy. . . A household and an economy
face many decisions:
. . . The word economy comes from a Who will work?
Greek word for “one who manages a What goods and how many of them
household.” should be produced?
What resources should be used in
production?
At what price should the goods be
sold?
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Society and Scarce Resources: Scarcity . . .
The management of society’s . . . means that society has limited
resources is important because resources and therefore cannot
resources are scarce. produce all the goods and services
people wish to have.
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1
Economics Economists study. . .
Economicsis the study of how How people make decisions.
society manages its scarce How people interact with each other.
resources.
The forces and trends that affect the
economy as a whole.
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Ten Principles of Economics Ten Principles of Economics
How People Make Decisions How People Interact
People face tradeoffs. Trade can make everyone better off.
The cost of something is what you give Markets are usually a good way to
up to get it. organize economic activity.
Rational people think at the margin. Governments can sometimes improve
People respond to incentives. economic outcomes.
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Ten Principles of Economics
How the Economy as a Whole Works 1. People face tradeoffs.
The standard of living depends on a “There is no such thing
country’s production. as a free lunch!”
Prices rise when the government prints
too much money.
Society faces a short-run tradeoff
between inflation and unemployment.
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2
1. People face tradeoffs. 1. People face tradeoffs.
To get one thing, we usually Efficiency v. Equity
have to give up another thing.
Guns v. butter Efficiency means society gets the most
Food v. clothing that it can from its scarce resources.
Leisure time v. work Equitymeans the benefits of those
Efficiency v. equity resources are distributed fairly among
the members of society.
Making decisions requires trading
off one goal against another.
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2. The cost of something is 2. The cost of something is
what you give up to get it. what you give up to get it.
Decisions require comparing costs and The opportunity cost of an
benefits of alternatives. item is what you give up to
Whether to go to college or to work? obtain that item.
Whether to study or go out on a date?
Whether to go to class or sleep in?
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3. Rational people think at the 4. People respond to incentives.
margin.
Marginal changes are small, incremental Marginal changes in costs or benefits
adjustments to an existing plan of action. motivate people to respond.
The decision to choose one alternative
over another occurs when that
People make decisions by comparing alternative’s marginal benefits exceed its
costs and benefits at the margin. marginal costs!
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3
4. People respond to incentives. 5. Trade can make everyone
better off.
People gain from their ability to
LA Laker basketball trade with one another.
star Kobe Bryant chose Competition results in gains from
to skip college and go
straight to the NBA trading.
from high school when Trade allows people to specialize in
offered a $10 million what they do best.
contract.
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6. Markets are usually a good 6. Markets are usually a good
way to organize economic way to organize economic
activity. activity.
In a market economy, households Adam Smith made the
decide what to buy and who to work observation that households
for. and firms interacting in
Firms decide who to hire and what markets act as if guided by an
.”
to produce. “invisible hand
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6. Markets are usually a good 7. Governments can
way to organize economic sometimes improve market
activity. outcomes.
Because households and firms look at prices
when deciding what to buy and sell, they When the market fails (breaks
unknowingly take into account the social down) government can intervene to
costs of their actions. promote efficiency and equity.
As a result, prices guide decision makers to
reach outcomes that tend to maximize the
welfare of society as a whole.
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