PowerPoint Lecture Notes for Chapter 1: Ten Principles of Economics

Principles of Economics 4th edition, by N. Gregory Mankiw

PowerPoint Slides by Ron Cronovich

Dear Colleague,
1 Ten Principles of Economics
Thank you for trying out the new Mankiw PowerPoints. I’ve put a lot
PRINCIPLES OF of effort into them and I’m very proud of them. I’m confident you
ECONOMICS will find them helpful.
FOURTH EDITION

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suggestions you have. Please email them to me at
roncron@unlv.nevada.edu.

In this area (the “notes” section), I will occasionally include notes

that will be visible only by you, and will not display during your
presentation in class. These notes contain additional information that
might be helpful in your teaching. So before you present a chapter in
class, please take a quick scan of the “notes” area of all slides in that
chapter.

For chapter 1, most instructors try to cover this chapter in a single

class session (especially those that are teaching the second of a two-
semester sequence). If you are teaching a “principles of
microeconomics” course, you might consider skipping Principles 8-
10, as they deal with macroeconomics.

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?

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 1

 What economics is all about
§ Scarcity refers to the limited nature of society’s
resources.
§ Economics is the study of how society manages
its scarce resources, including
• how people decide how much to work, save,
and spend, and what to buy
• 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
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
You might want to elaborate a bit on some of the points made here.
Some examples are below:
“How do people decide how much to work?” Time is scarce
resource – many of our students know this very well. There’s just not
enough time to do everything we’d like to do. How do we decide
how much of our time to spend working? There’s a tradeoff: the
more time we spend working, the higher our income, and therefore
the more stuff we can buy. But, the more time we spend working, the
2
less time we have for leisure – hanging out with friends, going hiking,
watching movies, etc. (You might want to ask your students how
THEY decide how much time to spend working. Some will say it
depends on how many classes they are taking, or the time
requirements of the available jobs. But probably at least a few will
say the wage – the higher the wage, the more worthwhile to work.)

“How do firms decide what kind of labor to hire?” Firms can hire
unskilled or skilled workers. The skilled workers are more
productive, but cost more than the unskilled workers.

“How do firms decide how much to produce?” Ask your students,

and see if any of them say “it depends on the price of the product they
sell.” (Probably some will say “it depends on whether there’s a lot of
demand for the product”. To which you might respond “and if
there’s a lot of demand for the product, what does that mean for the
price that firms can get for the product?”)

HOW PEOPLE MAKE DECISIONS

Decision-making is at the heart of economics. The individual must
decide how much to save for retirement, how much to spend on
§ Decision-making is different goods and services, how many hours a week to work. The
at the heart of
economics. firm must decide how much to produce, what kind of labor to hire.
§ The first four Society as a whole must decide how much to spend on national
principles deal with
how people make defense (“guns”) versus how much to spend on consumer goods
decisions. (“butter”).

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 3

HOW PEOPLE MAKE DECISIONS

Principle
Principle #1:
#1: People
People Face
Face Tradeoffs
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 might otherwise be used to produce
consumer goods.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 4

 HOW PEOPLE MAKE DECISIONS The last point is expressed rather tersely on the slide; you may want
Principle
Principle #1:
#1: People
People Face
Face Tradeoffs
Tradeoffs to elaborate verbally to insure that the point is clear.
§ Society faces an important tradeoff:
efficiency vs. equity
§ efficiency: getting the most out of scarce
“Redistribute income from the rich to the poor” is accomplished
resources through the progressive tax system, as well as social programs like
§ equity: distributing prosperity fairly among food stamps and unemployment insurance that try to provide a safety
society’s members
§ Tradeoff: To increase equity, can redistribute net for people at the low end of the income distribution.
income from the well-off to the poor.
But this reduces the incentive to work and produce,
and shrinks the size of the economic “pie.” “But this reduces the incentive to work hard” – the reward for
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 5
working hard is a high income. Taxes reduce this reward, and
therefore reduce the incentive to work hard.

HOW PEOPLE MAKE DECISIONS

Principle
Principle #2:
#2: The
The Cost
Cost ofof Something
Something Is
Is What
What
You
You Give
Give Up
Up to
to Get
Get ItIt
§ Making decisions requires comparing the costs
and benefits of alternative choices.
§ The opportunity cost of any item is whatever
must be given up to obtain it.
§ It is the relevant cost for decision-making.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 6

HOW PEOPLE MAKE DECISIONS Here’s a fun tangent, if you have the class time and are so inclined:
Principle
Principle #2:
#2: The
The Cost
Cost ofof Something
Something Is
Is What
What
You
You Give
Give Up
Up to
to Get
Get ItIt Ask your students about the saying “The best things in life are free.”
Examples: Ask them to name some of these things that supposedly are free. Ask
The opportunity cost of…
…going to college for a year is not just the tuition,
them what “free” means in this context. The idea here is to get them
books, and fees, but also the foregone wages. to see that even things without an explicit monetary cost are not truly
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.
“free,” because they have an opportunity cost.

For example, when you ask them to name the “best things” that are
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 7
“free,” they will respond with answers like love, sitting at the top of a
mountain you just climbed and enjoying an awesome view, or maybe
witnessing the joy of a child who has just been given a new toy. In
each case, there is no explicit monetary cost, but there’s an
opportunity cost.

For example, a day spent climbing a mountain represents a day of

foregone wages. And the fact that the mountain offers the incredible
view probably means that land has been set aside for a national park
that might otherwise be used to produce industrial chemicals, or it
might be used for a subdivision of million-dollar homes.

With love, it’s less obvious, but if prodded enough, your students will
be able to think of non-monetary costs associated with love. For
example, you might not want to see the latest Ashton Kutcher film,
you might think he’s the world’s worst actor. But your
boyfriend/girlfriend/teenaged daughter or other loved one is DYING
to see it, they are BEGGING you to take them. So you take them.
That’s true love, don’t you think? And it’s certainly not free.
 HOW PEOPLE MAKE DECISIONS This definition of “rational” is new to the 4th edition of the textbook.
Principle
Principle #3:
#3: Rational
Rational People
People Think
Think at
at the
the You might want to elaborate a bit on what economists mean by
Margin
Margin “rational.”
§ A person is rational if she systematically and
purposefully does the best she can to achieve
her objectives. In economics, a rational consumer makes decisions about the goods
§ Many decisions are not “all or nothing,” she buys (which ones and how much of each) with the goal of
but involve marginal changes – incremental
adjustments to an existing plan. maximizing her well-being, subject to her income, the prices of the
§ Evaluating the costs and benefits of marginal goods, and her preferences.
changes is an important part of decision-making.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 8
Another rational economic actor – the firm – decides how much
output to produce, what price to charge, and how many workers to
hire in order to maximize its profits.

HOW PEOPLE MAKE DECISIONS

Principle
Principle #3:
#3: Rational
Rational People
People Think
Think at
at the
the
Margin
Margin
Examples:
§ A student considers whether to go to college
for an additional year, comparing the fees &
foregone wages to the extra income he could
earn with an extra year of education.
§ A firm considers whether to increase output,
comparing the cost of the needed labor and
materials to the extra revenue.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 9

HOW PEOPLE MAKE DECISIONS The definition of “incentive” is new to the 4th edition.
Principle
Principle #4:
#4: People
People Respond
Respond to
to Incentives
Incentives
§ incentive: something that induces a person to
act, i.e. the prospect of a reward or punishment.
§ Rational people respond to incentives because
they make decisions by comparing costs and
benefits. Examples:
• In response to higher gas prices,
sales of “hybrid” cars (e.g. Toyota Prius) rise.
• In response to higher cigarette taxes,
teen smoking falls.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 10

ACTIVE LEARNING 1: Most of these PowerPoint chapters have two or three Active Learning
Exercise activities. They break up the lecture with a short in-class activity for
You are selling your 1996 Mustang. You have immediate reinforcement, application, or assessment of the material in the
already spent $1000 on repairs.
preceding slides.
At the last minute, the transmission dies. You can
pay $600 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have A good idea is to give students time to formulate their answers before asking
the transmission repaired?
for volunteers to share their answers with the class. When the questions or
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t exercises are more complex, consider having them work in pairs.
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
Digression on class participation:
11
In general, it’s not a good idea to try to solicit participation by saying “Now
who can tell me the answer to….”. The invariable result is regular
participation by very few students – the quick thinkers that have the
confidence to answer spontaneously in front of the class – while most
students remain silent.

When students have a bit of time to think through their answers, they are
more likely to be comfortable sharing their answers with you and the class.
Even better: try a simple, time-tested activity called “THINK-PAIR-
SHARE.” Pair students up. Pose a question or problem. Have students
work on the problem individually for a couple minutes. Then, allow a
couple minutes to work in pairs: each student tries to explain to the other
why his or her answer is correct, and the other offers feedback. In many
cases, they come up with better answers by working together. Finally, ask
for volunteers. Students are much more likely to participate since they have
had the opportunity to “test” their answers on a classmate. And those who
do not participate will at least have had the chance to share their answer
with, and get feedback from, one other student.

Activities like these are useful to break up a lecture every 20 minutes or so.
They help maintain students’ attention spans, and increase their
comprehension of the material you cover. These activities are also useful for
quick, informal assessment – often, they will alert you to problems (such as
students not getting what you think they’re getting) which you can then
correct before moving on to cover additional material.
End of digression.

ACTIVE LEARNING 1:
Answers
Cost of fixing transmission = $600
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t
Benefit of fixing the transmission = $800
($6500 – 5700).
It’s worthwhile to have the transmission fixed.
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
Benefit of fixing the transmission is only $500.
Paying $600 to fix transmission is not worthwhile.
12
ACTIVE LEARNING 1: If you wish, you can omit this slide and just give this information to
Answers the class verbally.
Observations:
§ The $1000 you previously spent on repairs is
irrelevant. What matters is the cost and benefit
of the marginal repair (the transmission).
§ The change in incentives from scenario A
to scenario B caused your decision to change.

13

HOW PEOPLE INTERACT

Whether we’re talking about the U.S. economy, or the local economy,
the term “economy” simply means a group of people interacting with
§ An “economy” is just each other.
a group of people
interacting with
each other.
These interactions play a critical role in the allocation of society’s
§ The next
three principles scarce resources. For example, the interaction of buyers and sellers
deal with how people determines the prices of goods and the amounts produced and sold.
interact.
These interactions are an important part of what economists study.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 14

HOW PEOPLE INTERACT If each person had to grow his own food, make his own clothes, cut
Principle
Principle #5:
#5: Trade
Trade Can
Can Make
Make Everyone
Everyone Better
Better his own hair, we would have a world full of skinny, unfashionable
Off
Off poor people having bad hair days every day of the week.
§ Rather than being self-sufficient, people can
specialize in producing one good or service
and exchange it for other goods. It’s far more efficient for each person to specialize in producing a
§ Countries also benefit from trade & specialization: good or service, and then exchanging it with other people for the
• get a better price abroad for goods they
produce things they produce.
• buy other goods more cheaply from abroad
than could be produced at home
The statement “trade can make everyone better off” should not be
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 15
hard to understand, if you think about it for a moment: Each of two
parties would not voluntarily enter into an exchange if it made either
of them worse off, now would they?

The same principles apply at the national and international level:

International trade allows countries to sell their exports abroad and
get a higher price, and to buy things from abroad more cheaply than
they could produce at home.

In addition, trade gives a country’s consumers access to a greater

variety of goods – including goods they might not be able to get at
all. For example, U.S. consumers enjoy a variety of fresh produce
year-round. This would not be possible without international trade.
 HOW PEOPLE INTERACT A market economy is “decentralized,” meaning that there is no
Principle
Principle #6:
#6: Markets
Markets Are
Are Usually
Usually A
A Good
Good government committee that makes the decisions about what goods to
Way
Way to
to Organize
Organize Economic
Economic Activity
Activity produce and so forth. Instead, many households and firms make their
§ A market is a group of buyers and sellers. own decisions:
(They need not be in a single location.)
§ “Organize economic activity” means determining
• Each of many households decides who to work for and what goods
• what goods to produce to buy.
• how to produce them
• how much of each to produce
• Each of many firms decides whom to hire and what goods to
• who gets them produce.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 16

HOW PEOPLE INTERACT

Principle
Principle #6:
#6: Markets
Markets Are
Are Usually
Usually A
A Good
Good
Way
Way to
to Organize
Organize Economic
Economic Activity
Activity
§ In a market economy, these decisions result from
the interactions of many households and firms.
§ Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 17

HOW PEOPLE INTERACT

Principle
Principle #6:
#6: Markets
Markets Are
Are Usually
Usually A
A Good
Good
Way
Way to
to Organize
Organize Economic
Economic Activity
Activity
§ The invisible hand works through the price system:
• The interaction of buyers and sellers
determines prices of goods and services.
• Each price reflects the good’s value to buyers
and the cost of producing the good.
• Prices guide self-interested households and
firms to make decisions that, in many cases,
maximize society’s economic well-being.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 18

HOW PEOPLE INTERACT “Govt” is an abbreviation for government. Throughout all of the
Principle
Principle #7:
#7: Governments
Governments Can
Can Sometimes
Sometimes PowerPoint chapters, I will try to use abbreviations the way a
Improve
Improve Market
Market Outcomes
Outcomes thoughtful instructor would use them if writing on a blackboard. If
§ Important role for govt: enforce property rights you prefer to spell the word out, just use your mouse to highlight
(with police, courts)
§ People are less inclined to work, produce, invest, or “govt” and then type out the full word.
purchase if large risk of their property being stolen.
• A restaurant won’t serve meals if customers
do not pay before they leave. Many fledging market economies are struggling through the
• A music company won’t produce CDs if too many transition from central planning because they have not developed
people avoid paying by making illegal copies.
institutions that protect and enforce property rights. The British news
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 19
magazine The Economist has lots of current examples of this. An
older but still interesting example comes from a column that Mankiw
wrote in the June 12, 2000 issue of Fortune magazine entitled
“Ukraine: How Not To Run An Economy.”
 HOW PEOPLE INTERACT

Principle
Principle #7:
#7: Governments
Governments Can
Can Sometimes
Sometimes
Improve
Improve Market
Market Outcomes
Outcomes
§ Govt may alter market outcome to promote efficiency
§ market failure, when the market fails to allocate
society’s resources efficiently. Causes:
• externalities, when the production or consumption
of a good affects bystanders (e.g. pollution)
• market power, a single buyer or seller has
substantial influence on market price (e.g. monopoly)
§ In such cases, public policy may increase efficiency.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 20

HOW PEOPLE INTERACT

Principle
Principle #7:
#7: Governments
Governments Can
Can Sometimes
Sometimes
Improve
Improve Market
Market Outcomes
Outcomes
§ Govt may alter market outcome to promote equity
§ If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can change
how the economic “pie” is divided.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 21

A C T I V E L E A R N I N G 2:
Discussion Questions
In each of the following situations, what is the
government’s role? Does the government’s
intervention improve the outcome?
a. Public schools for K-12
b. Workplace safety regulations
c. Public highways
d. Patent laws, which allow drug companies to
charge high prices for life-saving drugs
22
The items in this list are meant to get students thinking about Principles 6
and 7 in the context of specific examples, and to generate discussion rather
than arrive at definitive answers.
NOTE: Discussing the entire list would consume a lot of class time (20-
25 minutes). Two would suffice. Pick your favorite two and delete the
others. Of course, you can skip this slide entirely if you wish to get
through the chapter as quickly as possible.
Here are some notes which might help guide the discussion:
a. Public schools. The alternative would private schools. The cost of
education would be concentrated among those with school-aged children,
rather than spread over all taxpayers, so the price per child would likely be
high. Some families would not be able to afford to enroll their children in
schools, and would either home-school the children or raise them without
education. Is the benefit to society of having an educated population large
enough to justify making people without children share in the cost? Could
the private sector provide education more efficiently (either at lower cost or
higher quality) than the public sector?
b. Workplace safety regulations. Without such regulations, would firms
provide a safe environment for their workers? Some students will say “no –
look at how bad working conditions are in poor countries which have no
safety regulations.” Another view is dropping such regulations would make
workers better off. Workers may view the safety of their work environment
as part of their wage: the less safe the environment at a specific firm, the
higher the wage the firm will have to offer to make workers willing to work
there. If workers vary with respect to their tolerance for unsafe conditions,
then workers with a high risk tolerance would be better off if given the
option to work for higher wages in factories that aren’t as safe. Such
workers would be worse off if the government required all firms to provide
equally safe conditions.
c. Public highways. The alternative would be toll highways operated by
the private sector. People who use highways more would pay more, and
people that use them less would pay less, which seems fairer than having
everyone pay equally for highways. (Actually, everyone does not pay
equally - people who use public roads more buy more gas, and therefore pay
more gas tax.) If there are external benefits to society of having a national
highway system, then the private sector would under-provide this good.
d. Patent laws. I’ve kind of loaded the question with the wording on the
slide. If you wish, change it to just “Patent laws.” Is it fair that drug
companies charge such high prices for drugs that some people need to stay
alive? If drug prices are regulated, how might pharmaceutical firms
respond?
 HOW THE ECONOMY AS A WHOLE WORKS

§ The last three

principles deal with
the economy as a
whole.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 23

HOW THE ECONOMY AS A WHOLE WORKS On this slide, “rich countries” refers to countries like the U.S., Japan,
Principle
Principle #8:
#8: A A country’s
country’s standard
standard of
of living
living and Germany, “poor countries” refers to countries like India,
depends
depends onon its
its ability
ability to
to produce
produce goods
goods & & Indonesia, and Nigeria.
services.
services.
§ Huge variation in living standards across
countries and over time:
• Average income in rich countries is more than
ten times average income in poor countries.
• The U.S. standard of living today is about
eight times larger than 100 years ago.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 24

HOW THE ECONOMY AS A WHOLE WORKS

Principle
Principle #8:
#8: A A country’s
country’s standard
standard of
of living
living
depends
depends onon its
its ability
ability to
to produce
produce goods
goods & &
services.
services.
§ The most important determinant of living standards:
productivity, the amount of goods and services
produced per unit of labor.
§ Productivity depends on the equipment, skills, and
technology available to workers.
§ Other factors (e.g. labor unions, competition from
abroad) have far less impact on living standards.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 25

HOW THE ECONOMY AS A WHOLE WORKS

Principle
Principle #9:
#9: Prices
Prices rise
rise when
when the
the
government
government prints
prints too
too much
much money.
money.
§ Inflation: increases in the general level of prices.
§ In the long run, inflation is almost always caused
by excessive growth in the quantity of money,
which causes the value of money to fall.
§ The faster the govt creates money,
the greater the inflation rate.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 26

 HOW THE ECONOMY AS A WHOLE WORKS While the long-run effect of increasing the quantity of money is
Principle
Principle #10:
#10: Society
Society faces
faces aa short-run
short-run inflation, the short-run effects are more complicated - and
tradeoff
tradeoff between
between inflation
inflation and
and unemployment
unemployment controversial. However, most mainstream economists believe
§ In the short-run (1 – 2 years), following: An increase in the quantity of money causes spending to
many economic policies push inflation and
unemployment in opposite directions. rise, which causes prices to rise, which induces firms to produce more
§ Other factors can make this tradeoff more or less goods and services, which requires that they hire more workers.
favorable, but the tradeoff is always present.
Hence, in the short-run, increasing the quantity of money causes
inflation to rise, but unemployment to fall.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 27
Of course, REDUCING the quantity of money would have the
opposite effects (inflation would fall, while unemployment would
rise) in the short run.

Keep in mind, though, the lesson from Principle #9: In the long run,
changing the quantity of money only affects inflation. We will learn
in a later chapter what determines the rate of unemployment in the
long run, and we will see that it has nothing to do with the quantity of
money.

The second point on this slide – “Other factors can make this tradeoff
more or less favorable, but the tradeoff is always present” – addresses
the following point: In some decades, factors outside of the control
of policymakers make inflation and unemployment both high (e.g.
1970s) – or low (e.g. 1990s). Yet, given these other factors,
policymakers can always reduce unemployment temporarily by
creating more inflation, or vice versa.

FYI: How to read your textbook Most students, especially those in their first year of college, have not
1. Summarize, don’t highlight. been taught good study skills. Yet, we professors expect them to
Highlighting is a passive activity that won’t improve
your comprehension or retention. Instead, summarize
know how to study. Your university may offer free one-time
each section in a few sentences of your own words.
When you finish, compare your summary to the one
workshops for students on study skills; if so, you might announce
at the end of the chapter. them in class. In the meantime, we offer your students this FYI box
2. Test yourself.
Try the “QuickQuiz” that follows each section before
in the textbook, reproduced here in the PowerPoint presentation of
moving on to the next section. Write your answers chapter 1.
down, and compare them to the answers in the back
of the book. If your answers are incorrect, review the
section before moving on.
If you’re pressed for time, you can omit it from your presentation of
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 28
the chapter, and instead just refer students to it in the textbook.

FYI: How to read your textbook

If you do not like “They are often good practice for the exams,”
3. Practice, practice, practice. please feel free to delete it. I’ve found, though, that students are more
Work through the end-of-chapter review questions
and problems. They are often good practice for the
motivated to work practice problems when they think that doing so
exams. And the more you use your new knowledge,
the more solid it will become.
will help them earn a higher score on the exam.
4. Go online.
The book comes with excellent web resources,
including practice quizzes, tools to strengthen your
graphing skills, helpful video clips, and other
resources to help you learn the textbook material
more easily and effectively.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 29

 FYI: How to read your textbook
5. Study in groups.
Get together with a few of your classmates to review
each chapter, quiz each other, and help each other
understand the material in the chapter.
6. Don’t forget the real world.
Read the Case Studies and In The News boxes in
each chapter. They will help you see how the new
terms, concepts, models, and graphs apply to the real
world. As you read the newspaper or watch the
evening news, see if you can find the connections
with what you’re learning in the textbook.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 30

Conclusion
§ Economics offers many insights about the
behavior of people, markets, and economies.
§ It is based on a few ideas that can be applied
in many situations.
§ Whenever we refer back to one of the
Ten Principles from this chapter,
you will see an icon like this one:

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 31

Many instructors do not use class time to cover the chapter

CHAPTER SUMMARY summaries. They appear in the textbook.
§ The principles of decision-making are:
• People face tradeoffs
• The cost of any action is measured in terms of
foregone opportunities.
• Rational people make decisions by comparing
marginal costs and marginal benefits.
• People respond to incentives.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 32

CHAPTER SUMMARY
§ The principles of interactions among people are:
• Trade can be mutually beneficial.
• Markets are usually a good way of
coordinating trade.
• Govt can potentially improve market
outcomes if there is a market failure
or if the market outcome is inequitable.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 33

CHAPTER SUMMARY
§ The principles of the economy as a whole are:
• Productivity is the ultimate source of living
standards.
• Money growth is the ultimate source of
inflation.
• Society faces a short-run tradeoff between
inflation and unemployment.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 34