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2nd Principle:
The cost of something is what you give up to get it
Making decision requires individuals to consider the benefits and costs of an action. Opportunity
cost ; whatever must be given up in order to obtain some item.
EXAMPLE:
The cost of pizza and a hamburger with fries are the exact same .if ryan chooses to
buy the hamburger with fries, the opportunity cost would be the enjoyment of cheesy delicious
pizza.
3rd Principle:
Rational people thinking at the margin
Consumers want to purchase the bundle of goods and services that allow them the greatest
level of satisfaction given their incomes and the prices they face.
EXAMPLE:
I assert that if gasoline prices rise by 50% due to reduction in supply ,many people
will drive less . when some people hear the statement , they react , thinking that they are
disagree with comments like ‘I will still drive to work’. They probably would stop driving to work
.a few would , but most probably would,t .it’s an issue of moral or less,not all or nothing.
4th Principle:
Economic Incentives
Incentive is something that induces a person to act [by offering rewards to people who change
their behavior].
Example:
Bill is a very important business man. He has too much work. He is not sure he will get it all done
then he get a idea.he can ask his employees to get help him.He said Karen, would you mind doing
the financial report? She said No, that’s your job! What if I give you tomorrow off? Then Karen
reply I’ll have it on your desk by the end of the day. Bill said Jeffrey, would you put together the
quarterly report, Jeffery reply; I can’t. I’m too busy, then bill said I will give you $100 bonus!
Jeffrey replied, I’ll get to work on it right now.Because of incentives bill was able to persuade his
employees into helping finish all tasks.
5th Principle:
Trade can make everyone better off
The trade of is an exchange where you give up one thing in order to get something else that you
also desire. When you have to put with a half hour commute in order to make more money.
Example:
While you pay a bit more for organic beef, the trade off exists in the fact that you know your
meet will be free of pesticide reside.
6th Principle:
Markets are usually a good way to organize economic activity
Each of these households and firms act as it “led by an invisible hand” to promote economic
well-being.
Example:
Prices guides self interested household and firms to make decisions that in many cases maximize
society economic well being.
7th principle:
Government can sometimes improve market outcome
Property right, market failure, externality and market power in included in this.
Example:
A farmer won’t grow food if he expects his crop to be stolen.
8th Principle:
A country's standard of living depends on its ability to produce goods and
services
GDP, inflation, rate on per capita income is a part of this principle.They effects loving standard of
any economy.
Example:
Say that there are two countries. Country A is a centrally controlled- they somehow figured out to
match and even exceed the productivity of the typically laissez faire market, producing 25% more
‘stuff’ than country B. However, country A also controls every aspect of private life as well, decide
which stuff they can buy, how they use it, who they can associate with, when they travel and to
where, what their job will be.
On paper, it appears that country A is wealthier than country B, but is their standard of living really
any better?
I understand what Mankiw is getting at- the more successful the market,the better off its people
tend to be. What would be a better way to state this principle?
9th principle:
Prices rise when the government prints too much money
Prints too much money is a caused of inflation, the increasing money supply will lead to increase
in price level.
Example:
Suppose the economy produces 1,000 units of output.
Suppose the money suply (number of the notes and coins)=$10,000
This means that the average price of the output produced will be $10 (10,000/1000)
Suppose then that the government print an extra $5000 notes crating a total money supply of
%15,000; but, the output of the economy stays at 1,000 units.Effectively, people have more cash,
but, the number of goods id the same, Because people have more cash, they are willing tospend
more to buy the goods in the economy.
Ceteris paribus, the price of the 1000 units will increase to $15(15000/1000). The price has
increased, but the quantity of output stays the same.People are not better off, and the value of
money has decreased; e.g.
A $10 note buys fewer goods than previously.
10th principle:
Society faces a short-run trade off between inflation and unemployment
Business cycle play key role in inflation and unemployment fluctuations in economic activity
such as employment and production.
Example:
There are occasions when you can see a trade-off.
For example, between 1979 and 1983, we see inflation (CPI) fall from 15% to 2.5%. During
this period, we see a rise in unemployment from 5% to 11% .
In the late 1980s, inflation falls from 6.5% to 2.8%. But unemployment rises from 5 to 8
percent.
In 2008, we saw inflation fall from 5% to 2%. During this time, we see a sharp rise in
unemployment from 5% to over 10%
This suggest there can be a trade off.