Principles of
Microeconomics,
10e
Chapter 1: Ten Principles of
Economics
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duplicated, or posted to a publicly accessible website, in whole or in part.
1
Icebreaker Activity: Scarcity
1. Break up into groups of two and introduce yourselves to each other.
2. Identify something scarce in your life and the reason for the scarcity.
• For example, “Since I work and go to school, my time is very scarce.”
3. Describe an example of how this scarcity manifested itself in your life over the
last week, and the decision you had to make because of it.
4. Introduce the example to the class.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter Objectives
By the end of this chapter, you should be able to:
• Explain how scarcity influences decisions.
• Explain how individuals evaluate opportunity costs to make decisions.
• Explain how marginal analysis influences decision making.
• Apply basic, economic principles of individual decision making that determine
how an economy generally works.
• Explain how the terms of trade can lead to gains.
• Given a scenario, identify the distribution system being used.
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duplicated, or posted to a publicly accessible website, in whole or in part.
3
1-1
How People Make Decisions
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4
Ten Principles of Economics (1 of 3)
• Scarcity*
• Resources are scarce
• Society has limited resources and, therefore, cannot produce all the goods
and services people want
• Economics*
• The study of how society manages its scarce resources
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
5
Ten Principles of Economics (2 of 3)
• Economists examine how people make choices
• How much they work, what they buy, how much they save, how they invest
their savings
• Economists study how people interact with one another
• How buyers and sellers together determine the price at which a good is sold
and the quantity that is sold
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
6
Ten Principles of Economics (3 of 3)
• Economists analyze forces and trends that affect the overall economy
• The growth in average income, the fraction of the population that cannot find
work, and the rate at which prices are rising
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7
Principle 1: People Face Trade-Offs (1 of 4)
• No free lunch
• To get one thing you want, you usually must give up another thing you want
• Making decisions
• Trading off one goal against another
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duplicated, or posted to a publicly accessible website, in whole or in part.
8
Principle 1: People Face Trade-Offs (2 of 4)
• People
• Society
• How to allocate time
• How to spend income
• For example
• For example, protecting the
environment
• Resources could be used to produce
consumer goods
• Working longer hours, less time for
leisure
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duplicated, or posted to a publicly accessible website, in whole or in part.
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Principle 1: People Face Trade-Offs (3 of 4)
• Efficiency*
• Society is getting the most it can from its scarce resources
• The size of the economic pie
• Equality*
• Distributing economic prosperity uniformly among the members of society
• How evenly the pie is divided into individual slices
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
10
Principle 1: People Face Trade-Offs (4 of 4)
• Trade-off
• To achieve greater equality, redistribute income
• But this reduces incentive to work and produce, shrinking size of economic
pie
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duplicated, or posted to a publicly accessible website, in whole or in part.
11
Principle 2: The Cost of Something Is What
You Give Up to Get It
People face trade-offs and need to:
• Compare costs and benefits of alternatives
• Include opportunity costs
Opportunity cost*
• Whatever must be given up to obtain some item
*Words accompanied by an asterisk are key terms from the chapter.
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duplicated, or posted to a publicly accessible website, in whole or in part.
12
Principle 3: Rational People Think at the
Margin
• Rational people*
• Systematically and purposefully do the best they can to achieve their goals,
given the available opportunities
• Make decisions by evaluating costs and benefits of marginal changes
• Marginal change*: Small incremental adjustment to a plan of action
• Take action if
• Marginal benefits > Marginal costs
*Words accompanied by an asterisk are key terms from the chapter.
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duplicated, or posted to a publicly accessible website, in whole or in part.
13
Active Learning 1: Thinking at the Margin
You pay $8/month for access to Disney Plus, regardless of how many movies or
TV shows you watch in a month. Should you watch one more movie (or episode)?
Why?
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duplicated, or posted to a publicly accessible website, in whole or in part.
14
Active Learning 1: Answers
Disney Plus
• Marginal benefit of watching one more movie
• The enjoyment you get from watching the movie
• Marginal cost of watching one more movie
• Monetary cost = $0
• Opportunity cost of time
• Decision
• If the marginal benefit exceeds the marginal cost, watch the movie
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duplicated, or posted to a publicly accessible website, in whole or in part.
15
Principle 4: People Respond to Incentives
• Incentive*
• Something that induces a person to act
• Can have unintended consequences
• For example, at a higher price buyers consume less, sellers produce more
• People respond to incentives
• Because rational people make decisions by comparing costs and benefits
*Words accompanied by an asterisk are key terms from the chapter.
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duplicated, or posted to a publicly accessible website, in whole or in part.
16
Active Learning 2: Applying the Principles
You are selling your black 1967 Chevy Impala. You have already spent $2,000 on
repairs. At the last minute, the transmission dies. You can pay $1,400 to have it
repaired or sell the car “as is.”
In each of the following scenarios, should you have the transmission repaired?
A. Blue book value (what you could get for the car) is $14,500 if transmission
works, $11,200 if it doesn’t
B. Blue book value is $12,300 if transmission works, $11,000 if it doesn’t
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
17
Active Learning 2: Answers
A. Blue book value is $14,500 if transmission works, $11,200 if it doesn’t
• Benefit of fixing transmission = $3,300 ($14,500 – $11,200)
• Get the transmission fixed
B. Blue book value is $12,300 if transmission works, $11,000 if it doesn’t
• Benefit of fixing the transmission = $1,300 ($12,300 – $11,000)
• Do not pay $1,400 to fix it
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
18
1-2
How People Interact
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duplicated, or posted to a publicly accessible website, in whole or in part.
19
Principle 5: Trade Can Make Everyone Better
Off
• People benefit from trade
• People can buy a greater variety of goods and services at lower cost
• Countries benefit from trade
• Allows countries to specialize in what they do best
• Enjoy a greater variety of goods and services
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
20
Principle 6: Markets Are Usually a Good Way
to Organize Economic Activity (1 of 4)
• Most countries that once had centrally planned economies have now shifted
toward market economies
• In a market economy*
• The decisions of a central planner are replaced by those of millions of firms
and households
• Firms decide whom to hire and what to make
• Households decide where to work and what to buy with their incomes
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
21
Principle 6: Markets Are Usually a Good Way
to Organize Economic Activity (2 of 4)
• Firms and households interact in the marketplace, where prices and self-interest
guide their decisions
• Adam Smith’s 1776 book, An Inquiry into the Nature and Causes of the
Wealth of Nations: Firms and households in competitive markets act as if
they are guided by an “invisible hand” that leads them to desirable outcomes
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
22
Principle 6: Markets Are Usually a Good Way
to Organize Economic Activity (3 of 4)
• Prices are the instrument with which the invisible hand directs economic activity
• In a competitive market:
• Sellers look at the price when deciding how much to supply
• Buyers look at the price when deciding how much to demand
• As a result of their decisions, price reflects both the sellers’ costs of production
and the value of the good to the buyers
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
23
Principle 6: Markets Are Usually a Good Way
to Organize Economic Activity (4 of 4)
• Important corollary to Smith’s insight:
• When a government prevents prices from adjusting to supply and demand, it
impedes the invisible hand’s ability to coordinate the decisions of the firms
and households that make up an economy
• Helps to explain the adverse effect of most taxes on the allocation of resources
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
24
Principle 7: Governments Can Sometimes
Improve Market Outcomes (1 of 3)
• Government is needed to
• Enforce rules
• Enforce property rights*
• Promote efficiency
• Promote equality
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
25
Principle 7: Governments Can Sometimes
Improve Market Outcomes (2 of 3)
• Market failure*
• Situation in which a market left on its own does not allocate resources
efficiently
• Causes could include externality or market power
• Externality*
• Impact of one person’s actions on the well-being of a bystander
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
26
Principle 7: Governments Can Sometimes
Improve Market Outcomes (3 of 3)
• Market power*
• Ability to unduly influence market prices
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
27
Active Learning 3: The Government
• In each of the following situations, what is the government’s role?
• Does the government’s intervention improve the outcome?
• Public schools for K-12
• Workplace safety regulations
• Public highways
• Patent laws, which allow drug companies to charge high prices for life-saving drugs
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
28
1-3
How the Economy as a Whole Works
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
29
Principle 8: A Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services (1 of 2)
• Large differences in living standards around the world
• For example, 2019 average income is $65,000 in the U.S. and $5,000 in
Nigeria
• Large changes in living standards over time
• For example, U.S. standard of living today is eight times greater than that
100 years ago
• Almost all variation is attributable to differences in countries’ productivity
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
30
Principle 8: A Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services (2 of 2)
• Productivity*
• Quantity of goods and services produced from each unit of labor input
• Higher productivity
• Higher standard of living
• Growth rate of nation’s productivity
• Determines growth rate of its average income
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
31
Principle 9: Prices Rise When the
Government Prints Too Much Money (1 of 2)
• Inflation*
• An increase in the overall level of prices in the economy
• High inflation
• Imposes various costs on society
• Goal of economic policymakers
• Keep inflation at a reasonable rate
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
32
Principle 9: Prices Rise When the
Government Prints Too Much Money (2 of 2)
• In the long run
• Inflation is almost always caused by excessive growth in the quantity of
money, which causes the value of money to fall
• The faster the government creates money, the greater the inflation rate
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
33
Principle 10: Society Faces a Short-Run Trade-Off
between Inflation and Unemployment (1 of 2)
• Short-run effects of increasing money growth
• Stimulates the overall level of spending and demand for goods and services
• Higher demand causes firms to raise prices, hire more workers, and produce
a larger quantity of goods and services
• More hiring means lower unemployment
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
34
Principle 10: Society Faces a Short-Run Trade-Off
between Inflation and Unemployment (2 of 2)
• Short-run trade-off between unemployment and inflation
• Many economic policies push unemployment and inflation in opposite
directions
• Key role in analysis of business cycle
• Business cycle*
• Fluctuations in economic activity, such as employment and production
*Words accompanied by an asterisk are key terms from the chapter.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
35
1-4
Conclusion
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duplicated, or posted to a publicly accessible website, in whole or in part.
36
Conclusion
• In the coming chapters
• We will develop specific insights about people, markets, and economies
• We will refer to the Ten Principles of Economics introduced in this chapter
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
37
Ten Principles of Economics
How People Make Decisions
How People Interact
How the Economy as a Whole
Works
1. People face trade-offs.
5. Trade can make everyone better 8. A country’s standard of living
off.
depends on its ability to produce
goods and services.
2. The cost of something is what
you give up to get it.
6. Markets are usually a good way
to organize economic activity.
9. Prices rise when the
government prints too much
money.
3. Rational people think at the
margin.
7. Governments can sometimes
improve market outcomes.
10. Society faces a short-run
trade-off between inflation and
unemployment.
4. People respond to incentives.
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
38
Think-Pair-Share Activity
Your university decides to reduce the price of a parking permit on campus from $250 per
semester to $10 per semester.
A. The number of students desiring to park their cars on campus will Blank.
B. The amount of time it would take to find a parking place will Blank.
C. Will the lower price of a parking permit necessarily lower the true cost of parking?
(Hint: opportunity cost)
D. Would the opportunity cost of parking be the same for students with no outside
employment and students with jobs earning $15 per hour?
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
39
Self-Assessment
• What is economics all about?
• Which of the Ten Principles of Economics relates to decision making for your
daily life?
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
40
Summary
Click the link to review the objectives for this presentation.
Link to Objectives
Mankiw, Principles of Microeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
41