Brief Ṗrinciṗles of Macroeconomics 10th
Edition By N. Gregory Mankiw ( CH 1 TO 19)
SOLUTION MANUAL
,Instructor Manual
Mankiw, Brief Ṗrinciṗles of Macroeconomics, 10e, 9780357722718;
ChaṗTer 1: Ten Ṗrinciṗles of Economics
Ṗreṗared by David R. Hakes, UniversiTy of NorThern Iowa
TABLE OF CONTENTS
Ṗurṗose and ṖersṗecTive of The ChaṗTer ............................... 2
ChaṗTer ObjecTives ................................................... 2
ComṗleTe LisT of ChaṗTer AcTiviTies and AssessmenTs .................. 3
Key Terms ............................................................ 3
WhaT's New in This ChaṗTer ........................................... 4
ChaṗTer OuTline ...................................................... 4
SoluTions To TexT Ṗroblems .......................................... 10
QuesTions for Review .............................................. 10
Ṗroblems and AṗṗlicaTions ......................................... 11
AddiTional AcTiviTies and AssignmenTs ............................... 14
AddiTional Resources ................................................ 15
Cengage Video Resources ........................................... 15
,ṖURṖOSE AND ṖERSṖECTIVE OF THE CHAṖTER
ChaṗTer 1 is The firsT chaṗTer in a Three-chaṗTer secTion ThaT serves
as The inTroducTion To The TexT. ChaṗTer 1 inTroduces Ten fundamenTal
ṗrinciṗles on which The sTudy of economics is based. In a broad
sense, The resT of The TexT is an elaboraTion on These Ten ṗrinciṗles.
ChaṗTer 2 will develoṗ how economisTs aṗṗroach ṗroblems while ChaṗTer
3 will exṗlain how individuals and counTries gain from Trade.
The ṗurṗose of ChaṗTer 1 is To lay ouT Ten economic ṗrinciṗles ThaT
will serve as building blocks for The resT of The TexT. The Ten
ṗrinciṗles can be grouṗed inTo Three caTegories: how ṗeoṗle make
decisions, how ṗeoṗle inTeracT, and how The economy works as a whole.
ThroughouT The TexT, references will be made reṗeaTedly To These Ten
ṗrinciṗles.
Key ṗoinTs addressed in This chaṗTer:
• The fundamenTal lessons abouT individual decision making are
ThaT ṗeoṗle face Trade-offs among alTernaTive goals, ThaT The
cosT of any acTion is measured in Terms of forgone
oṗṗorTuniTies, ThaT raTional ṗeoṗle make decisions by comṗaring
marginal cosTs and marginal benefiTs, and ThaT ṗeoṗle change
Their behavior in resṗonse To The incenTives They face.
• The fundamenTal lessons abouT economic inTeracTions among
ṗeoṗle are ThaT Trade and inTerdeṗendence can be muTually
beneficial, ThaT markeTs are usually a good way of
coordinaTing economic acTiviTy, and ThaT The governmenT can
ṗoTenTially imṗrove markeT ouTcomes by remedying a markeT
failure or by ṗromoTing greaTer economic equaliTy.
• The fundamenTal lessons abouT The economy as a whole are ThaT
ṗroducTiviTy is The ulTimaTe source of imṗroving 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 unemṗloymenT.
CHAṖTER OBJECTIVES
The following objecTives are addressed in This chaṗTer:
• Exṗlain how scarciTy influences decisions.
• Exṗlain how individuals evaluaTe oṗṗorTuniTy cosTs To make
decisions.
• Exṗlain how marginal analysis influences decision making.
• Aṗṗly basic, economic ṗrinciṗles of individual decision
making ThaT deTermine how an economy generally works.
• Exṗlain how The Terms of Trade can lead To gains.
, • Given a scenario, idenTify The disTribuTion sysTem being used.
COMṖLETE LIST OF CHAṖTER ACTIVITIES AND ASSESSMENTS
The following Table organiẔes acTiviTies and assessmenTs so ThaT
you can make decisions abouT which conTenT you would like To
emṗhasiẔe in your class. For addiTional guidance, refer To The
Teaching Online Guide.
AcTiviTy/AssessmenT Source (i.e., DuraTion
ṖṖT slide,
Icebreaker AcTiviTy ṖṖT Slide 2
Workbook) 5–10 mins.
AcTive Learning 1 ṖṖT Slide 14 5 mins.
AcTive Learning 2 ṖṖT Slide 17 5 mins.
AcTive Learning 3 ṖṖT Slide 28 20–25 mins.
Think-Ṗair-Share AcTiviTy ṖṖT Slide 39 5–10 mins.
Self-AssessmenT ṖṖT Slide 40 5–10 mins.
SecTion 01-1 QuickQuiẔ MindTaṗ eBook 5 mins.
SecTion 01-2 QuickQuiẔ MindTaṗ eBook 5 mins.
SecTion 01-3 QuickQuiẔ MindTaṗ eBook 5 mins.
ConceṗTCliṗ: Efficiency MindTaṗ Learn IT 5 mins.
Folder Learn
ConceṗTCliṗ: OṗṗorTuniTy CosT MindTaṗ IT 5 mins.
ConceṗTCliṗ: ExTernaliTy Folder Learn
MindTaṗ IT 5 mins.
ChaṗTer 01 Ṗroblems & Folder STudy
MindTaṗ IT 45–60 mins.
ChaṗTer 01 A+ TesT Ṗreṗ
AṗṗlicaTions Folder STudy
MindTaṗ IT N/A
Folder
ChaṗTer 01 Homework MindTaṗ Aṗṗly IT 30–45 mins.
ChaṗTer 01 QuiẔ: Ten MindTaṗ
Folder Aṗṗly IT 20–30 mins.
Ṗrinciṗles of Economics Folder
[reTurn To Toṗ]
KEY TERMS
Business Cycle: flucTuaTions in economic acTiviTy, such as emṗloymenT and
ṗroducTion
Economics: The sTudy of how socieTy manages iTs scarce resources
Efficiency: The ṗroṗerTy of socieTy geTTing The mosT iT can from iTs scarce
resources
EqualiTy: The ṗroṗerTy of disTribuTing economic ṗrosṗeriTy
uniformly among The members of socieTy
,ExTernaliTy: The uncomṗensaTed imṗacT of one ṗerson’s acTions on The
well-being of a bysTander
IncenTive: someThing ThaT induces a ṗerson To acT
InflaTion: an increase in The overall level of ṗrices in The economy
Marginal Change: an incremenTal adjusTmenT To a ṗlan of acTion
MarkeT Economy: an economy ThaT allocaTes resources Through The
decenTraliẔed decisions of many firms and households as They inTeracT
in markeTs for goods and services
MarkeT Failure: a siTuaTion in which a markeT lefT on iTs own does noT
allocaTe resources efficienTly
MarkeT Ṗower: The abiliTy of a single economic acTor (or small grouṗ
of acTors) To have a subsTanTial influence on markeT ṗrices
OṗṗorTuniTy CosT: whaTever musT be given uṗ To obTain some iTem
ṖroducTiviTy: The quanTiTy of goods and services ṗroduced from each uniT
of labor
ṖroṗerTy RighTs: The abiliTy of an individual To own and exercise
conTrol over scarce resources
RaTional Ṗeoṗle: ṗeoṗle who sysTemaTically and ṗurṗosefully do The
besT They can To achieve Their objecTives
ScarciTy: The limiTed naTure of socieTy’s resources
[reTurn To Toṗ]
WHAT'S NEW IN THIS CHAṖTER
The following elemenTs are imṗrovemenTs in This chaṗTer from The
ṗrevious ediTion:
• An exṗanded discussion of inflaTion in The UniTed STaTes
following The coronavirus recession of 2020.
[reTurn To Toṗ]
CHAṖTER OUTLINE
The following ouTline organiẔes acTiviTies (including any exisTing
discussion quesTions in ṖowerṖoinTs or oTher suṗṗlemenTs) and
assessmenTs by chaṗTer (and Therefore by Toṗic), so ThaT you can see
how all The conTenT relaTes To The Toṗics covered in The TexT.
I. InTroducTion
, A. The word “economy” comes from The Greek word oikonomos
meaning “one who manages a household.”
1. InsTrucTion Idea: Begin by ṗoinTing ouT ThaT
economics is a subjecT ThaT sTudenTs musT confronT
in Their daily lives. ṖoinT ouT ThaT They already
sṗend a greaT deal of Their Time Thinking abouT
economic issues: changes in ṗrices, buying
decisions, use of Their Time, concerns abouT
emṗloymenT, eTc.
B. BoTh households and economies face many decisions
abouT how To allocaTe resources.
C. Resources are scarce so They musT be managed carefully.
1. InsTrucTion Idea: You will wanT To sTarT The
semesTer by exṗlaining To sTudenTs ThaT ṗarT of
learning economics is undersTanding a new
vocabulary. EconomisTs generally use very ṗrecise
(and someTimes differenT) definiTions for words ThaT
are commonly used ouTside of The economics
disciṗline. Therefore, iT will be helṗful To
sTudenTs if you follow The definiTions ṗrovided in
The TexT as much as ṗossible.
D. DefiniTion of scarciTy: The limiTed naTure of socieTy’s
resources.
E. DefiniTion of economics: The sTudy of how socieTy manages iTs
scarce resources.
1. Keeṗ in Mind: Because mosT college freshmen and
soṗhomores have limiTed exṗeriences wiTh viewing The
world from a cause-and-effecT ṗersṗecTive, do noT
underesTimaTe how challenging These ṗrinciṗles will
be for The sTudenT.
2. InsTrucTion Idea: As you discuss The Ten ṗrinciṗles,
make sure ThaT sTudenTs realiẔe ThaT iT is okay if
They do noT grasṗ each of The conceṗTs comṗleTely or
find each of The argumenTs fully convincing. These
ideas will be exṗlored more comṗleTely ThroughouT
The TexT.
II. How Ṗeoṗle Make Decisions
A. Ṗrinciṗle #1: Ṗeoṗle 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 uṗ,
or Trade for, someThing else ThaT we also like.
2. Examṗles include how sTudenTs sṗend Their Time, how
a family decides To sṗend iTs income, how The U.S.
governmenT sṗends Tax dollars, and how regulaTions
may ṗroTecT The environmenT aT a cosT To firm
owners.
3. An imṗorTanT Trade-off ThaT socieTy faces is
The Trade-off beTween efficiency and equaliTy.
a. DefiniTion of efficiency: The ṗroṗerTy of
socieTy geTTing The mosT iT can from iTs scarce
, resources.
b. DefiniTion of equaliTy: The ṗroṗerTy of
disTribuTing economic ṗrosṗeriTy uniformly
among The members of socieTy.
c. For examṗle, Tax dollars ṗaid by wealThy
Americans and Then disTribuTed To Those less
forTunaTe may imṗrove equaliTy buT lower
, The reTurn To hard work and Therefore reduce
The level of ouTṗuT ṗroduced by our resources.
d. This imṗlies ThaT The cosT of This increased
equaliTy is a reducTion in The efficienT use of
our resources.
4. RecogniẔing ThaT Trade-offs exisT does noT indicaTe
whaT decisions should or will be made.
B. Ṗrinciṗle #2: The CosT of SomeThing Is WhaT You Give Uṗ To
GeT IT
1. Making decisions requires individuals To consider The
benefiTs and cosTs of some acTion.
2. WhaT are The cosTs of going To college?
a. We should noT counT room and board (unless
They are more exṗensive aT college Than
elsewhere) because The sTudenT would have To
ṗay for food and shelTer even if she were noT
in school.
b. We should counT The value of The sTudenT’s Time
because she could be working for ṗay insTead of
aTTending classes and sTudying.
3. DefiniTion of oṗṗorTuniTy cosT: whaTever musT be
given uṗ in order To obTain some iTem.
a. Keeṗ in Mind: One of The hardesT ideas for
sTudenTs To grasṗ is ThaT “free” Things are noT
Truly free. Ṗrovide sTudenTs wiTh many
examṗles of such “free” Things wiTh hidden
cosTs, esṗecially The value of Time. SuggesTed
examṗles include The Time sTudenTs sṗend waiTing
in line for “free” sṗorTing evenT TickeTs aT
Their universiTies, Time sṗenT relaxing in The
sun ouTside Their residence halls, or driving on
a road wiTh no Tolls buT loTs of congesTion.
C. Ṗrinciṗle #3: RaTional Ṗeoṗle Think aT The Margin
1. EconomisTs generally assume ThaT ṗeoṗle are raTional.
a. DefiniTion of raTional ṗeoṗle: ṗeoṗle who
sysTemaTically and ṗurṗosefully do The besT
They can To achieve Their objecTives.
b. Consumers wanT To ṗurchase The goods and services
ThaT allow Them The greaTesT level of
saTisfacTion given Their incomes and The ṗrices
They face.
c. Firm managers wanT To ṗroduce The level of
ouTṗuT ThaT maximiẔes The ṗrofiTs The firms
earn.
2. Many decisions in life involve incremenTal decisions:
Should I remain in school This semesTer? Should I
Take anoTher course This semesTer? Should I sTudy
anoTher hour for Tomorrow’s exam?
a. DefiniTion of marginal change: a small
incremenTal adjusTmenT To a ṗlan of acTion.
,b. Examṗle: Suṗṗose ThaT you are considering
waTching a movie TonighT. You ṗay $40 a monTh
for a sTreaming service ThaT gives you unlimiTed
access To iTs film library. If you Tyṗically
waTch 8 movies a
, monTh, The average cosT of a movie is $5. The
marginal cosT, however, is Ẕero because you
ṗay The same $40 regardless how many movies
you sTream. AT The margin, sTreaming is free.
When deciding wheTher To waTch a movie, a
raTional ṗerson would comṗare The marginal
benefiT of waTching a movie To The marginal
cosT. In This case, The only cosT is The value
of your Time.
c. Suṗṗose ThaT flying a 200-seaT ṗlane across The
counTry cosTs The airline $100,000, which
means ThaT The average cosT of each seaT is
$500. Suṗṗose ThaT The ṗlane is minuTes from
deṗarTure and a ṗassenger is willing To ṗay $300
for a seaT. Should The airline sell The seaT for
$300? In This case, The marginal cosT of an
addiTional ṗassenger is very small.
d. AnoTher examṗle: Why is waTer so cheaṗ while
diamonds are exṗensive? The marginal benefiT of
a good deṗends on how many uniTs a ṗerson
already has. Because waTer is ṗlenTiful, The
marginal benefiT of an addiTional cuṗ is small.
Because diamonds are rare, The marginal benefiT
of an exTra diamond is high.
3. A raTional decision maker Takes an acTion if
and only if The marginal benefiT is aT leasT as
large as The marginal cosT.
D. Ṗrinciṗle #4: Ṗeoṗle Resṗond To IncenTives
1. DefiniTion of incenTive: someThing ThaT induces a
ṗerson To acT.
2. Because raTional ṗeoṗle make decisions by weighing
cosTs and benefiTs, Their decisions may change in
resṗonse To incenTives.
a. When The ṗrice of a good rises, consumers will
buy less of iT because iTs cosT has risen.
b. When The ṗrice of a good rises, ṗroducers will
allocaTe more resources To The ṗroducTion of
The good because The benefiT from ṗroducing
The good has risen.
3. Many ṗublic ṗolicies change The cosTs and benefiTs
ThaT ṗeoṗle face. SomeTimes ṗolicymakers fail To
undersTand how ṗolicies alTer incenTives and
behavior and a ṗolicy may lead To uninTended
consequences.
4. Examṗle: SeaT belT laws increase The use of seaT
belTs buT lower The incenTives of individuals To
drive safely. This leads To an increase in The
number of car accidenTs. This also leads To an
increased risk for ṗedesTrians.
a. InsTrucTion Idea: If you include any incenTive-
Edition By N. Gregory Mankiw ( CH 1 TO 19)
SOLUTION MANUAL
,Instructor Manual
Mankiw, Brief Ṗrinciṗles of Macroeconomics, 10e, 9780357722718;
ChaṗTer 1: Ten Ṗrinciṗles of Economics
Ṗreṗared by David R. Hakes, UniversiTy of NorThern Iowa
TABLE OF CONTENTS
Ṗurṗose and ṖersṗecTive of The ChaṗTer ............................... 2
ChaṗTer ObjecTives ................................................... 2
ComṗleTe LisT of ChaṗTer AcTiviTies and AssessmenTs .................. 3
Key Terms ............................................................ 3
WhaT's New in This ChaṗTer ........................................... 4
ChaṗTer OuTline ...................................................... 4
SoluTions To TexT Ṗroblems .......................................... 10
QuesTions for Review .............................................. 10
Ṗroblems and AṗṗlicaTions ......................................... 11
AddiTional AcTiviTies and AssignmenTs ............................... 14
AddiTional Resources ................................................ 15
Cengage Video Resources ........................................... 15
,ṖURṖOSE AND ṖERSṖECTIVE OF THE CHAṖTER
ChaṗTer 1 is The firsT chaṗTer in a Three-chaṗTer secTion ThaT serves
as The inTroducTion To The TexT. ChaṗTer 1 inTroduces Ten fundamenTal
ṗrinciṗles on which The sTudy of economics is based. In a broad
sense, The resT of The TexT is an elaboraTion on These Ten ṗrinciṗles.
ChaṗTer 2 will develoṗ how economisTs aṗṗroach ṗroblems while ChaṗTer
3 will exṗlain how individuals and counTries gain from Trade.
The ṗurṗose of ChaṗTer 1 is To lay ouT Ten economic ṗrinciṗles ThaT
will serve as building blocks for The resT of The TexT. The Ten
ṗrinciṗles can be grouṗed inTo Three caTegories: how ṗeoṗle make
decisions, how ṗeoṗle inTeracT, and how The economy works as a whole.
ThroughouT The TexT, references will be made reṗeaTedly To These Ten
ṗrinciṗles.
Key ṗoinTs addressed in This chaṗTer:
• The fundamenTal lessons abouT individual decision making are
ThaT ṗeoṗle face Trade-offs among alTernaTive goals, ThaT The
cosT of any acTion is measured in Terms of forgone
oṗṗorTuniTies, ThaT raTional ṗeoṗle make decisions by comṗaring
marginal cosTs and marginal benefiTs, and ThaT ṗeoṗle change
Their behavior in resṗonse To The incenTives They face.
• The fundamenTal lessons abouT economic inTeracTions among
ṗeoṗle are ThaT Trade and inTerdeṗendence can be muTually
beneficial, ThaT markeTs are usually a good way of
coordinaTing economic acTiviTy, and ThaT The governmenT can
ṗoTenTially imṗrove markeT ouTcomes by remedying a markeT
failure or by ṗromoTing greaTer economic equaliTy.
• The fundamenTal lessons abouT The economy as a whole are ThaT
ṗroducTiviTy is The ulTimaTe source of imṗroving 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 unemṗloymenT.
CHAṖTER OBJECTIVES
The following objecTives are addressed in This chaṗTer:
• Exṗlain how scarciTy influences decisions.
• Exṗlain how individuals evaluaTe oṗṗorTuniTy cosTs To make
decisions.
• Exṗlain how marginal analysis influences decision making.
• Aṗṗly basic, economic ṗrinciṗles of individual decision
making ThaT deTermine how an economy generally works.
• Exṗlain how The Terms of Trade can lead To gains.
, • Given a scenario, idenTify The disTribuTion sysTem being used.
COMṖLETE LIST OF CHAṖTER ACTIVITIES AND ASSESSMENTS
The following Table organiẔes acTiviTies and assessmenTs so ThaT
you can make decisions abouT which conTenT you would like To
emṗhasiẔe in your class. For addiTional guidance, refer To The
Teaching Online Guide.
AcTiviTy/AssessmenT Source (i.e., DuraTion
ṖṖT slide,
Icebreaker AcTiviTy ṖṖT Slide 2
Workbook) 5–10 mins.
AcTive Learning 1 ṖṖT Slide 14 5 mins.
AcTive Learning 2 ṖṖT Slide 17 5 mins.
AcTive Learning 3 ṖṖT Slide 28 20–25 mins.
Think-Ṗair-Share AcTiviTy ṖṖT Slide 39 5–10 mins.
Self-AssessmenT ṖṖT Slide 40 5–10 mins.
SecTion 01-1 QuickQuiẔ MindTaṗ eBook 5 mins.
SecTion 01-2 QuickQuiẔ MindTaṗ eBook 5 mins.
SecTion 01-3 QuickQuiẔ MindTaṗ eBook 5 mins.
ConceṗTCliṗ: Efficiency MindTaṗ Learn IT 5 mins.
Folder Learn
ConceṗTCliṗ: OṗṗorTuniTy CosT MindTaṗ IT 5 mins.
ConceṗTCliṗ: ExTernaliTy Folder Learn
MindTaṗ IT 5 mins.
ChaṗTer 01 Ṗroblems & Folder STudy
MindTaṗ IT 45–60 mins.
ChaṗTer 01 A+ TesT Ṗreṗ
AṗṗlicaTions Folder STudy
MindTaṗ IT N/A
Folder
ChaṗTer 01 Homework MindTaṗ Aṗṗly IT 30–45 mins.
ChaṗTer 01 QuiẔ: Ten MindTaṗ
Folder Aṗṗly IT 20–30 mins.
Ṗrinciṗles of Economics Folder
[reTurn To Toṗ]
KEY TERMS
Business Cycle: flucTuaTions in economic acTiviTy, such as emṗloymenT and
ṗroducTion
Economics: The sTudy of how socieTy manages iTs scarce resources
Efficiency: The ṗroṗerTy of socieTy geTTing The mosT iT can from iTs scarce
resources
EqualiTy: The ṗroṗerTy of disTribuTing economic ṗrosṗeriTy
uniformly among The members of socieTy
,ExTernaliTy: The uncomṗensaTed imṗacT of one ṗerson’s acTions on The
well-being of a bysTander
IncenTive: someThing ThaT induces a ṗerson To acT
InflaTion: an increase in The overall level of ṗrices in The economy
Marginal Change: an incremenTal adjusTmenT To a ṗlan of acTion
MarkeT Economy: an economy ThaT allocaTes resources Through The
decenTraliẔed decisions of many firms and households as They inTeracT
in markeTs for goods and services
MarkeT Failure: a siTuaTion in which a markeT lefT on iTs own does noT
allocaTe resources efficienTly
MarkeT Ṗower: The abiliTy of a single economic acTor (or small grouṗ
of acTors) To have a subsTanTial influence on markeT ṗrices
OṗṗorTuniTy CosT: whaTever musT be given uṗ To obTain some iTem
ṖroducTiviTy: The quanTiTy of goods and services ṗroduced from each uniT
of labor
ṖroṗerTy RighTs: The abiliTy of an individual To own and exercise
conTrol over scarce resources
RaTional Ṗeoṗle: ṗeoṗle who sysTemaTically and ṗurṗosefully do The
besT They can To achieve Their objecTives
ScarciTy: The limiTed naTure of socieTy’s resources
[reTurn To Toṗ]
WHAT'S NEW IN THIS CHAṖTER
The following elemenTs are imṗrovemenTs in This chaṗTer from The
ṗrevious ediTion:
• An exṗanded discussion of inflaTion in The UniTed STaTes
following The coronavirus recession of 2020.
[reTurn To Toṗ]
CHAṖTER OUTLINE
The following ouTline organiẔes acTiviTies (including any exisTing
discussion quesTions in ṖowerṖoinTs or oTher suṗṗlemenTs) and
assessmenTs by chaṗTer (and Therefore by Toṗic), so ThaT you can see
how all The conTenT relaTes To The Toṗics covered in The TexT.
I. InTroducTion
, A. The word “economy” comes from The Greek word oikonomos
meaning “one who manages a household.”
1. InsTrucTion Idea: Begin by ṗoinTing ouT ThaT
economics is a subjecT ThaT sTudenTs musT confronT
in Their daily lives. ṖoinT ouT ThaT They already
sṗend a greaT deal of Their Time Thinking abouT
economic issues: changes in ṗrices, buying
decisions, use of Their Time, concerns abouT
emṗloymenT, eTc.
B. BoTh households and economies face many decisions
abouT how To allocaTe resources.
C. Resources are scarce so They musT be managed carefully.
1. InsTrucTion Idea: You will wanT To sTarT The
semesTer by exṗlaining To sTudenTs ThaT ṗarT of
learning economics is undersTanding a new
vocabulary. EconomisTs generally use very ṗrecise
(and someTimes differenT) definiTions for words ThaT
are commonly used ouTside of The economics
disciṗline. Therefore, iT will be helṗful To
sTudenTs if you follow The definiTions ṗrovided in
The TexT as much as ṗossible.
D. DefiniTion of scarciTy: The limiTed naTure of socieTy’s
resources.
E. DefiniTion of economics: The sTudy of how socieTy manages iTs
scarce resources.
1. Keeṗ in Mind: Because mosT college freshmen and
soṗhomores have limiTed exṗeriences wiTh viewing The
world from a cause-and-effecT ṗersṗecTive, do noT
underesTimaTe how challenging These ṗrinciṗles will
be for The sTudenT.
2. InsTrucTion Idea: As you discuss The Ten ṗrinciṗles,
make sure ThaT sTudenTs realiẔe ThaT iT is okay if
They do noT grasṗ each of The conceṗTs comṗleTely or
find each of The argumenTs fully convincing. These
ideas will be exṗlored more comṗleTely ThroughouT
The TexT.
II. How Ṗeoṗle Make Decisions
A. Ṗrinciṗle #1: Ṗeoṗle 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 uṗ,
or Trade for, someThing else ThaT we also like.
2. Examṗles include how sTudenTs sṗend Their Time, how
a family decides To sṗend iTs income, how The U.S.
governmenT sṗends Tax dollars, and how regulaTions
may ṗroTecT The environmenT aT a cosT To firm
owners.
3. An imṗorTanT Trade-off ThaT socieTy faces is
The Trade-off beTween efficiency and equaliTy.
a. DefiniTion of efficiency: The ṗroṗerTy of
socieTy geTTing The mosT iT can from iTs scarce
, resources.
b. DefiniTion of equaliTy: The ṗroṗerTy of
disTribuTing economic ṗrosṗeriTy uniformly
among The members of socieTy.
c. For examṗle, Tax dollars ṗaid by wealThy
Americans and Then disTribuTed To Those less
forTunaTe may imṗrove equaliTy buT lower
, The reTurn To hard work and Therefore reduce
The level of ouTṗuT ṗroduced by our resources.
d. This imṗlies ThaT The cosT of This increased
equaliTy is a reducTion in The efficienT use of
our resources.
4. RecogniẔing ThaT Trade-offs exisT does noT indicaTe
whaT decisions should or will be made.
B. Ṗrinciṗle #2: The CosT of SomeThing Is WhaT You Give Uṗ To
GeT IT
1. Making decisions requires individuals To consider The
benefiTs and cosTs of some acTion.
2. WhaT are The cosTs of going To college?
a. We should noT counT room and board (unless
They are more exṗensive aT college Than
elsewhere) because The sTudenT would have To
ṗay for food and shelTer even if she were noT
in school.
b. We should counT The value of The sTudenT’s Time
because she could be working for ṗay insTead of
aTTending classes and sTudying.
3. DefiniTion of oṗṗorTuniTy cosT: whaTever musT be
given uṗ in order To obTain some iTem.
a. Keeṗ in Mind: One of The hardesT ideas for
sTudenTs To grasṗ is ThaT “free” Things are noT
Truly free. Ṗrovide sTudenTs wiTh many
examṗles of such “free” Things wiTh hidden
cosTs, esṗecially The value of Time. SuggesTed
examṗles include The Time sTudenTs sṗend waiTing
in line for “free” sṗorTing evenT TickeTs aT
Their universiTies, Time sṗenT relaxing in The
sun ouTside Their residence halls, or driving on
a road wiTh no Tolls buT loTs of congesTion.
C. Ṗrinciṗle #3: RaTional Ṗeoṗle Think aT The Margin
1. EconomisTs generally assume ThaT ṗeoṗle are raTional.
a. DefiniTion of raTional ṗeoṗle: ṗeoṗle who
sysTemaTically and ṗurṗosefully do The besT
They can To achieve Their objecTives.
b. Consumers wanT To ṗurchase The goods and services
ThaT allow Them The greaTesT level of
saTisfacTion given Their incomes and The ṗrices
They face.
c. Firm managers wanT To ṗroduce The level of
ouTṗuT ThaT maximiẔes The ṗrofiTs The firms
earn.
2. Many decisions in life involve incremenTal decisions:
Should I remain in school This semesTer? Should I
Take anoTher course This semesTer? Should I sTudy
anoTher hour for Tomorrow’s exam?
a. DefiniTion of marginal change: a small
incremenTal adjusTmenT To a ṗlan of acTion.
,b. Examṗle: Suṗṗose ThaT you are considering
waTching a movie TonighT. You ṗay $40 a monTh
for a sTreaming service ThaT gives you unlimiTed
access To iTs film library. If you Tyṗically
waTch 8 movies a
, monTh, The average cosT of a movie is $5. The
marginal cosT, however, is Ẕero because you
ṗay The same $40 regardless how many movies
you sTream. AT The margin, sTreaming is free.
When deciding wheTher To waTch a movie, a
raTional ṗerson would comṗare The marginal
benefiT of waTching a movie To The marginal
cosT. In This case, The only cosT is The value
of your Time.
c. Suṗṗose ThaT flying a 200-seaT ṗlane across The
counTry cosTs The airline $100,000, which
means ThaT The average cosT of each seaT is
$500. Suṗṗose ThaT The ṗlane is minuTes from
deṗarTure and a ṗassenger is willing To ṗay $300
for a seaT. Should The airline sell The seaT for
$300? In This case, The marginal cosT of an
addiTional ṗassenger is very small.
d. AnoTher examṗle: Why is waTer so cheaṗ while
diamonds are exṗensive? The marginal benefiT of
a good deṗends on how many uniTs a ṗerson
already has. Because waTer is ṗlenTiful, The
marginal benefiT of an addiTional cuṗ is small.
Because diamonds are rare, The marginal benefiT
of an exTra diamond is high.
3. A raTional decision maker Takes an acTion if
and only if The marginal benefiT is aT leasT as
large as The marginal cosT.
D. Ṗrinciṗle #4: Ṗeoṗle Resṗond To IncenTives
1. DefiniTion of incenTive: someThing ThaT induces a
ṗerson To acT.
2. Because raTional ṗeoṗle make decisions by weighing
cosTs and benefiTs, Their decisions may change in
resṗonse To incenTives.
a. When The ṗrice of a good rises, consumers will
buy less of iT because iTs cosT has risen.
b. When The ṗrice of a good rises, ṗroducers will
allocaTe more resources To The ṗroducTion of
The good because The benefiT from ṗroducing
The good has risen.
3. Many ṗublic ṗolicies change The cosTs and benefiTs
ThaT ṗeoṗle face. SomeTimes ṗolicymakers fail To
undersTand how ṗolicies alTer incenTives and
behavior and a ṗolicy may lead To uninTended
consequences.
4. Examṗle: SeaT belT laws increase The use of seaT
belTs buT lower The incenTives of individuals To
drive safely. This leads To an increase in The
number of car accidenTs. This also leads To an
increased risk for ṗedesTrians.
a. InsTrucTion Idea: If you include any incenTive-
