The first 4 principles of economics

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 ho u sehold ” . 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 )