Chapter 1/Ten Principles of Economics ❖ 1
1
TEN PRINCIPLES OF ECONOMICS
WHAT’S NEW IN THE EIGHTH EDITION:
There is a new case study “Adam Smith Would Have Loved Uber.”
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
➢ that economics is about the allocation of scarce resources.
➢ that individuals face trade-offs.
➢ the meaning of opportunity cost.
➢ how to use marginal reasoning when making decisions.
➢ how incentives affect people’s behavior.
➢ why trade among people or nations can be good for everyone.
➢ why markets are a good, but not perfect, way to allocate resources.
, Chapter 1/Ten Principles of Economics ❖ 2
➢ what determines some trends in the overall economy.
CONTEXT AND PURPOSE:
Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to the text.
Chapter 1 introduces ten fundamental principles on which the study of economics is based. In a broad
sense, the rest of the text is an elaboration on these ten principles. Chapter 2 will develop how
economists approach problems while Chapter 3 will explain how individuals and countries gain from
trade.
The purpose of Chapter 1 is to lay out ten economic principles that will serve as building blocks for
the rest of the text. The ten principles can be grouped into three categories: how people make decisions,
how people interact, and how the economy works as a whole. Throughout the text, references will be
made repeatedly to these ten principles.
, Chapter 1/Ten Principles of Economics ❖ 3
KEY POINTS:
• The fundamental lessons about individual decision making are that people face trade-offs among
alternative goals, that the cost of any action is measured in terms of forgone opportunities, that
rational people make decisions by comparing marginal costs and marginal benefits, and that people
change their behavior in response to the incentives they face.
• The fundamental lessons about interactions among people are that trade and interdependence can
be mutually beneficial, that markets are usually a good way of coordinating economic activity
among people, and that the government can potentially improve market outcomes by remedying a
market failure or by promoting greater economic equality.
• The fundamental lessons about the economy as a whole are that productivity is the ultimate source
of improving living standards, that growth in the quantity of money is the ultimate source of
inflation, and that society faces a short-run trade-off between inflation and unemployment.
CHAPTER OUTLINE:
I. Introduction
Begin by pointing out that economics is a subject that students must confront in
their daily lives. Point out that they already spend a great deal of their time thinking
about economic issues: changes in prices, buying decisions, use of their time,
concerns about employment, etc.
A. The word “economy” comes from the Greek word oikonomos meaning “one who manages a
household.”
B. Both households and economies face many decisions about how to allocate resources.
C. Resources are scarce so they must be managed carefully.
You will want to start the semester by explaining to students that part of learning
economics is understanding a new vocabulary. Economists generally use very
precise (and sometimes different) definitions for words that are commonly used
outside of the economics discipline. Therefore, it will be helpful to students if you
follow the definitions provided in the text as much as possible.
, Chapter 1/Ten Principles of Economics ❖ 4
D. Definition of scarcity: the limited nature of society’s resources.
E. Definition of economics: the study of how society manages its scarce resources.
Because most college freshmen and sophomores have limited experiences with
viewing the world from a cause-and-effect perspective, do not underestimate how
challenging these principles will be for the student.
As you discuss the ten principles, make sure that students realize that it is okay if
they do not grasp each of the concepts completely or find each of the arguments
fully convincing.
II. How People These ideas will be explored more completely throughout the text.
Make Decisions
A. Principle #1: People Face Trade-offs
1. “There ain’t no such thing as a free lunch.” To get something that we like, we usually have to
give up, or trade for, something else that we also like.
2. Examples include how students spend their time, how a family decides to spend its income,
how the U.S. government spends tax dollars, and how regulations may protect the
environment at a cost to firm owners.
3. An important trade-off that society faces is the trade-off between efficiency and equality.
a. Definition of efficiency: the property of society getting the most it can from its
scarce resources.
b. Definition of equality: the property of distributing economic prosperity
uniformly among the members of society.
c. For example, tax dollars paid by wealthy Americans and then distributed to those less
fortunate may improve equality but lower the return to hard work and therefore reduce
the level of output produced by our resources.
d. This implies that the cost of this increased equality is a reduction in the efficient use of
our resources.
4. Recognizing that trade-offs exist does not indicate what decisions should or will be made.
B. Principle #2: The Cost of Something Is What You Give Up to Get It
1
TEN PRINCIPLES OF ECONOMICS
WHAT’S NEW IN THE EIGHTH EDITION:
There is a new case study “Adam Smith Would Have Loved Uber.”
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
➢ that economics is about the allocation of scarce resources.
➢ that individuals face trade-offs.
➢ the meaning of opportunity cost.
➢ how to use marginal reasoning when making decisions.
➢ how incentives affect people’s behavior.
➢ why trade among people or nations can be good for everyone.
➢ why markets are a good, but not perfect, way to allocate resources.
, Chapter 1/Ten Principles of Economics ❖ 2
➢ what determines some trends in the overall economy.
CONTEXT AND PURPOSE:
Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to the text.
Chapter 1 introduces ten fundamental principles on which the study of economics is based. In a broad
sense, the rest of the text is an elaboration on these ten principles. Chapter 2 will develop how
economists approach problems while Chapter 3 will explain how individuals and countries gain from
trade.
The purpose of Chapter 1 is to lay out ten economic principles that will serve as building blocks for
the rest of the text. The ten principles can be grouped into three categories: how people make decisions,
how people interact, and how the economy works as a whole. Throughout the text, references will be
made repeatedly to these ten principles.
, Chapter 1/Ten Principles of Economics ❖ 3
KEY POINTS:
• The fundamental lessons about individual decision making are that people face trade-offs among
alternative goals, that the cost of any action is measured in terms of forgone opportunities, that
rational people make decisions by comparing marginal costs and marginal benefits, and that people
change their behavior in response to the incentives they face.
• The fundamental lessons about interactions among people are that trade and interdependence can
be mutually beneficial, that markets are usually a good way of coordinating economic activity
among people, and that the government can potentially improve market outcomes by remedying a
market failure or by promoting greater economic equality.
• The fundamental lessons about the economy as a whole are that productivity is the ultimate source
of improving living standards, that growth in the quantity of money is the ultimate source of
inflation, and that society faces a short-run trade-off between inflation and unemployment.
CHAPTER OUTLINE:
I. Introduction
Begin by pointing out that economics is a subject that students must confront in
their daily lives. Point out that they already spend a great deal of their time thinking
about economic issues: changes in prices, buying decisions, use of their time,
concerns about employment, etc.
A. The word “economy” comes from the Greek word oikonomos meaning “one who manages a
household.”
B. Both households and economies face many decisions about how to allocate resources.
C. Resources are scarce so they must be managed carefully.
You will want to start the semester by explaining to students that part of learning
economics is understanding a new vocabulary. Economists generally use very
precise (and sometimes different) definitions for words that are commonly used
outside of the economics discipline. Therefore, it will be helpful to students if you
follow the definitions provided in the text as much as possible.
, Chapter 1/Ten Principles of Economics ❖ 4
D. Definition of scarcity: the limited nature of society’s resources.
E. Definition of economics: the study of how society manages its scarce resources.
Because most college freshmen and sophomores have limited experiences with
viewing the world from a cause-and-effect perspective, do not underestimate how
challenging these principles will be for the student.
As you discuss the ten principles, make sure that students realize that it is okay if
they do not grasp each of the concepts completely or find each of the arguments
fully convincing.
II. How People These ideas will be explored more completely throughout the text.
Make Decisions
A. Principle #1: People Face Trade-offs
1. “There ain’t no such thing as a free lunch.” To get something that we like, we usually have to
give up, or trade for, something else that we also like.
2. Examples include how students spend their time, how a family decides to spend its income,
how the U.S. government spends tax dollars, and how regulations may protect the
environment at a cost to firm owners.
3. An important trade-off that society faces is the trade-off between efficiency and equality.
a. Definition of efficiency: the property of society getting the most it can from its
scarce resources.
b. Definition of equality: the property of distributing economic prosperity
uniformly among the members of society.
c. For example, tax dollars paid by wealthy Americans and then distributed to those less
fortunate may improve equality but lower the return to hard work and therefore reduce
the level of output produced by our resources.
d. This implies that the cost of this increased equality is a reduction in the efficient use of
our resources.
4. Recognizing that trade-offs exist does not indicate what decisions should or will be made.
B. Principle #2: The Cost of Something Is What You Give Up to Get It
