Principles of Economics by N.G Mankiw: Ten Principles of Economics

Scarity: the limited nature of society’s resources

Economics: the study of how society manages its scarce resources

Efficiency: the property of society getting the most it can from its scarce resources

Equality: the property of distributing economic prosperity uniformly among the members of society

Opportunity Cost: whatever must be given up to obtain some items

Rational People: people who systematically and purposefully do the best they can to achieve their objectives

Marginal Change: a small incremental adjustment to a plan of action

Incentive: something that induces a people to act

Market Economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in the markets for goods and services

Property Rights: the ability of an individual to own and exercise control over scarce resources

Market Failure: a situation in which a market left on its own fails to allocate resources efficiently

Externality: the impact of one person’s action on the well-being of a bystander

Market Power: the ability of a single economic actor (or small group of actors) to have a substantial influences on market prices

Productivity: the quantity of goods and services produced from each unit of labor input

Inflation: an increase in the overall level of prices in the economy

Business Cycle: fluctuations in economic activity, such as employment and production

How People Make Decisions

Principle 1: People Face Trade-offs

trade-offs:

how students spend their time
how parents decide to spend their family income
guns and butter
a clean environment and a high level of income
efficiency and equality

Principle 2: The Cost of Something Is What You Give Up to Get It

the decision to go to college

obvious cost: tuition, books, room and board
not obvious cost: time and the earnings they give up to attend school

opportunity cost

Principle 3: Rational People Think at the Margin

Economists normally assume that people are rational.

Rational people know that decisions in life are rarely black and white but often involve shades of gray.

Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action.

Rational people make decisions by comparing marginal benefits and marginal costs.

examples:

movie streaming service
airline charge passengers
cheap water and expensive diamonds

A rational decision maker takes an action if and only if the action’s marginal benefit exceeds its marginal cost.

Principle 4: People Respond to Incentives

“People respond to incentives. The rest is commentary.”

market
policy making
How does a seat belt law affect auto safety?

How People Interact

Principle 5: Trade Can Make Everyone Better Off

competition between countries

Principle 6: Markets Are Usually Good Way to Organize Economic Activity

In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith made the most famous observation in all of economics: Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes.

Principle 7: Governments Can Sometimes Improve Market Outcomes

One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources.

Another reason we need government is that, although the invisible hand is powerful, it is not omnipotent.

promote efficiency
promote equality

the goal of efficiency

market failure
externality
- pollution
market power

How the Economy as a Whole Works

Principle 8: A Country’s Standard of Living Depends on Its Ability of Produce Goods and Services

Almost all variation in living standards is attributable to differences in countries’ productivity.

Principle 9: Prices Rise When the Government Prints Too Much Money

inflation

Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment

While an increase in the quantity of money primarily raises prices in the long run, the short-run story is more complex. Most economists describe the short-run effects of money growth as follows:

Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.
Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services.
More hiring means lower unemployment.

This short-run trade-off plays a key role in the analysis of the business cycle.