Greg Mankiw’s 10 Principles

Question 1

1. People face trade-offs

Answer 1

To get one thing, you must give up another. E.g leisure time vs work.
Making decisions requires trading off one goal against another.

Question 2

Environmental consequences vs economic growth

Answer 2

Increased production and population growth affects the environment.

Global impacts - climate change

Local impacts - pollution in cities, deforestation

These effects are results of both:
• the expansion of the economy (illustrated by the growth in total output)
• the way the economy is organized (what kinds of things are valued and conserved, for example).

Question 3

Efficiency vs equity

Answer 3

Efficiency: society gets the most that it can from scarce resources.

Equity: the benefits of those resources are distributed among members of society

Question 4

2. The cost of something is what you give up to get it.

Answer 4

Opportunity cost: what you give up to obtain a good/service

Everyday choices are marginal choices- marginal benefits and marginal costs.

There are no ‘all - or - nothing decisions’

Question 5

3. Rational people think at the margin

Answer 5

Marginal changes: small, incremental adjustments to an existing plan of action.

People make decisions by comparing costs and benefits at the margin.

Rational: people make consistent choices between alternatives.

Question 6

4. People respond to incentives.

Answer 6

Marginal changes in costs or benefits motivate people to respond.

The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs.

Public policies can create incentives or disincentives that alter behaviour.

Question 7

6. Markets are usually a good way to organise economic activity.

Answer 7

•A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

•Households decide what to buy and who to work for.
•Firms decide who to hire and what to produce.

Households and firms interacting in markets act as if guided by an “invisible hand.” - Adam Smith.

•When households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the costs of their actions.

•As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.

Question 8

7. Governments can sometimes improve market outcomes

Answer 8

•Market failure occurs when the market fails to allocate resources efficiently.

•When the market fails government can intervene to promote efficiency and equity.

•Market failure may be caused by:
•an externality, which is the impact of one person or firm’s actions on the well-being of a bystander.
•market power, which is the ability of a single person or firm to unduly influence market prices.