Mankiw (author of book) Intro Video:
• Economics- how society manages its scarce resources
◦ A study of mankind in the ordinary business of life
◦ It's about people: how they make decisions, interact with one another, and how their interactions inﬂuences the course of
• Learning economics will be useful in any career path
Chapter 1: 10 Principles of Economics
PRINCIPLES 1-4: HOW INDIVIDUALS MAKE DECISIONS
• #1: People face trade-oﬀs
◦ To get something we like, we usually have to give up something else that we like
• Study for Econ or study for psych?
• An hour spent studying for Econ -> gave up -> an hour she could've spent studying for psych
• Hours spent studying -> gave up -> hours she could've spent napping, watching tv, working, etc.
• Food, clothing, or family vacation
• Choosing to spend an extra dollar on one of these goods -> gave up -> one less dollar to spend on some other
‣ Society (guns & butter)
• The more society spends on national defense (guns) -> gave up -> less it can spend on consumer goods (butter)
◦ Eﬃciency vs. equality
‣ Eﬃciency- society is getting the maximum beneﬁts from its scarce resources
‣ Equality- those beneﬁts are distributed uniformly among society's members
• #2: The Cost of Something is What You Give up to Get It
◦ Making decisions requires comparing the costs and beneﬁts
‣ Go to college
• Beneﬁts: intellectual enrichment, lifetime of better job opportunities, etc.
• Costs: money spent on tuition, books, room and board, time etc.
• Some you can calculate, and some you can't
◦ Opportunity cost- of an item is what you give up to get that item
‣ Best alternative use of your resources
• Buy a coke for $2
◦ Was it best to spend $2 on soda? Or could there have been a better use of the $2? (Pen and pencils?)
‣ College athletes drop out of school and play professional sports
• Beneﬁts: make millions $
• Costs: not getting a college education
• Opportunity cost of attending college is very high
• Many decide that the beneﬁt of a college education is not worth the cost
◦ Cost doesn't need to be only in terms of money; it can be in terms of time
• #3: Rational People Think at the Margin
◦ Rational people- people that systematically & purposefully do the best they can to achieve their objectives, given the available
‣ Dinner time
• Not thinking: "should I fast or eat like a pig?"
• Actually thinking: "should I take that extra spoonful of mash potatoes?"
• Not thinking: blow exams or spend 24/7 studying?
• Actually thinking: spend an extra hour reviewing notes or watch tv?
◦ Marginal change- a small incremental adjustment to an existing plan of action
◦ Marginal decision making
‣ Why is water so cheap, while diamonds are so expensive?
• Humans need water to survive, while diamonds are unnecessary
◦ But for some reason people are willing to pay much more for a diamond than for a cup of water
◦ Water is essential but the marginal beneﬁt of an extra cup is small because water is plentiful
◦ No one needs diamonds to survive, but because diamonds are so rare, people consider the marginal
beneﬁt of an extra diamond to be large
◦ Rational decision makers take an action only if the marginal beneﬁt of the action exceeds the marginal cost
• #4: People Respond to Incentives
◦ Incentive- something (punishment or reward) that induces a person to act ◦ Ex.
‣ Price of an apple rises
• People decide to eat fewer apples, apple orchard hire more workers and harvest more apples
• Higher price in a market provides...
◦ an incentive for buyers to consume less
◦ an incentive for sellers to produce more
‣ Tax on gas
• Encourage people to drive smaller, more fuel-eﬃcient cars, carpool, take public transportation, live closer to work,
drive hybrid cars or electric cars, etc.
◦ When policy makers fail to consider how their policies aﬀect incentives, they end up with unintended consequences
‣ Laws requiring seat belts in cars
• Obvious eﬀect: when a person wears a seat belt, the probability of surviving an accident rises
• People drive more slowly and carefully when the beneﬁt of increased safety is high
◦ It is costly because it uses the driver's time and energy
• People respond to seat belts by driving faster and less carefully
◦ Seat belts result in little change in driver deaths and an increase in pedestrian deaths
PRINCIPLES 1-4: HOW INDIVIDUALS MAKE DECISIONS
PRINCIPLES 5-7: HOW INDIVIDUALS INTERACT W/ ONE ANOTHER
• #5: Trade Can Make Everyone Better Oﬀ
◦ Trade between two countries can make each country better oﬀ
‣ It is not a win/lose situation
• #6: Markets are Usually a Good Way to Organize Economic Activity
◦ Market economy- the decisions of a central planner are replaced by the dec