Mankiw: Brief Principles of Macroeconomics, Second Edition (Harcourt, 2001)

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Mankiw Brief Principles of Macroeconomics,
Second Edition (Harcourt, 2001)

• Ch. 1 Ten Principles of Economics

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What Is Economics?

• Economics tries to capture the rules of rational
  choice.
• If choice is to be made then there must be
  scarcity.
• Examples of scarcity are limited income, limited
  resources, limited time
• So many books, so little time! is an economic
  problem.

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Ten Principles of Economics

• How People Make Decisions.
• Principles 1-4.
• How People Interact.
• Principles 5-7.
• How the Economy as a Whole Works.
• Principles 8-10.

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Principle 1 People Face Tradeoffs

• Choices usually require giving up something else.
• This is true for individual and community
  decisions.
• Sometimes tradeoffs involve a choice between
  fairness and more wealth (equity vs. efficiency).

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Principle 2 Opportunity Cost

• The cost of something is not only the payment but
  also what one has to give up.
• Opportunity cost is the true cost of an action.
• Opportunity cost includes the hypothetical cost
  of sacrificing the best alternative.

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Principle 3 Thinking at the Margin

• Improvement to ones condition can usually take
  place by making marginal decisions.
• Marginal here means additional, extra.
• It is easier to identify and calculate the costs
  and benefits of an additional work/leisure.
• This is the source of the maximization rule
• Marginal benefit gt Marginal cost gt increase the
  activity.
• Marginal benefit lt Marginal cost gt reduce the
  activity.

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Principle 4 People Respond to Incentives

• When prices change, when new laws and regulations
  are put in practice, costs and benefits of
  actions also change forcing different actions and
  behavior.
• Unintended consequences of legislation may be
  more important because of the changed incentives.

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Principle 4 Trade Can Make Everyone Better Off

• Self-sufficiency forces families, countries to
  use their resources to produce a number of goods
  and services that they are not suited for.
• The cost of those activities are very high.
• By concentrating on activities they are suited
  for and produce cheaply, they can increase the
  ability to obtain a higher amount of goods that
  are costly to produce.
• Trade also increases the variety of choice.

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Principle 6 Markets Are Usually More Efficient
Than Government

• Individual producers and individual consumers
  know the costs and benefits of their actions
  best.
• When prices are determined through the
  interaction of buyers and sellers, each price
  reflects the cost and benefit of the last unit
  produced and consumed.

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Principle 7 Governments Can Sometimes Improve
Markets

• Externalities lead to market failure. The
  allocation of resources becomes non-optimal.
• Government (collective action) can improve the
  outcome.
• Market power (monopoly) also leads to market
  failure.
• Public goods may not be provided by the market
  unless governments intervene.

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Principle 8 Standard of Living in A Country
Depends on Productivity

• Productivity is the value of goods and services
  produced in an hour by average worker.
• Increasing the amount of labor, amount of capital
  or technology all increase the total amount of
  goods and services produced, raising the standard
  of living.
• Investment (increasing capital stock) and
  improving technology both increase productivity.

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Principle 9 Inflation Is The Result of Fast
Increase of Money

• An increase in the overall level of prices is
  called inflation.
• Growth in the money supply is the culprit for
  persistent inflation.
• Money is defined as any payment accepted in
  exchange for goods, services, assets.
• In US it is currency outside the banks plus
  checking account deposits.

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Principle 10 Only in the Short-run There Is a
Trade-off Between Inflation and Unemployment

• Because prices may not adjust to upward pressure
  immediately, in the short-run, output may
  increase because of higher demand in the economy.
• Likewise, during high inflation, efforts to lower
  the total demand in the economy may first result
  in increasing unemployment and after a while, in
  reducing inflation.