A summary of the first 4 principles of economics based on the book by Mankiw N.G - Principles of Economics

1. THE FIRST 4
PRINCIPLES OF
ECONOMICS
(the principles that tell how individuals make decisions)
Based on Principles of Economics by N.G. Mankiw

2. What is Economics
• Is a study of mankind in the ordinary business of life. –
Alfred Marshall
• The term economics comes from the greek word
oikomnomos, which means “one who manages a
household”.
• The management of society’s scarce resources

3. Principle I: People face trade-offs
• “There ain’t no such thing as a free lunch”
• Making decisions requires trading off one goal against
another.
• Another trade-off, society faces, is between efficiency and
equality.
Efficiency – the property of society of getting the most it can from its scarce resources
Equality – the property of distributing economic prosperity uniformly among the members
of society.
• When government policy is designed these two goals
often conflict (Ex: welfare system that achieves greater equality but reduces the efficiency)
• The study of economics starts by acknowledging life’s
trade-offs.

4. Principle I: The cost of smth is what you
give up to get it
• Because people face trade-offs, making decisions
requires comparing the costs and benefits of alternative
courses of action.
• The opportunity cost of an item is what you give up to get
that item.
• Example: When you decide to go to college, what you
give up? (you must consider what you truly give up – time,
the earnings you would get if you didn’t go and so on)

5. Principle III: Rational people think at the
margin
• Economics assume that people are rational (people who
systematically and purposefully do the best they can to
achieve their objectives)
• Marginal change – a small inicremental adjustment to a
plan of action. Margin means “edge”, so marginal
changes are adjustments around the edges of what you
are doing.
• Rational people often make decisions by comparing
marginal benefits and marginal costs.
• Additional units of a good should be produced as long as
marginal benefit exceeds marginal cost.

6. Principle IV: People respond to Incentives
• An incentive is something (a reward or prospect of
punishment) that induces the person to act.
• Incentives paly a central role in the study of economics.
They are the key to understanding how market works
• When analyzing any policy we must consider not only the
direct effects but also the less obvious indirect effects (Ex:
seat belt raw analysis by Sam Peltzman)