Chapter 1

Mankiw’s 10 Principles of Economics

Zander Gordan

Welcome

What is economics?

Mankiw’s definition: The study of how society manages its scarce resources.

Mine: Economics is what economists do (Jacob Viner)

Principle 1

People Face Trade-offs

  • “There’s no such thing as a free lunch.”

  • Choosing one thing means giving up something else.

Principle 2

The Cost of Something Is What You Give Up to Get It

  • Opportunity cost is central.

  • Includes both explicit and implicit costs.

Principle 3

Rational People Think at the Margin

  • “Rational people systematically and purposefully do the best they can to achieve their goals”

    • Note that economists are generally concerned with fixed goals

  • Decisions are made by comparing marginal benefits and marginal costs.

  • Example: deciding whether to study one more hour.

Principle 4

People Respond to Incentives

  • Behavior changes when costs or benefits change.

  • Policies must account for incentives.

Principle 5

Trade Can Make Everyone Better Off

  • Specialization and exchange increase overall welfare.

    • “The division of labor is limited by the extent of the market.” - Smith

  • Applies to individuals, firms, and nations.

Principle 6

Markets Are Usually a Good Way to Organize Economic Activity

  • “Invisible hand” of prices guides resources to efficient uses.

    • “Prices are a signal wrapped in an incentive” - Tabarrok and Cowen, paraphrasing Hayek

  • Decentralized decision-making often outperforms central planning.

Principle 7

Governments Can Sometimes Improve Market Outcomes

  • Enforce property rights.

  • Address market failures (e.g., externalities, monopoly).

  • Promote equity alongside efficiency.

Principle 8

A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services

  • Productivity is the key driver of long-run growth.

  • Human capital, technology, and institutions matter.

Principle 9

Prices Rise When the Government Prints Too Much Money

  • Inflation is linked to excessive money supply growth.

  • Historical cases: hyperinflation episodes. See Zimbabwe ’08, Argentina ’89, Weimar Germany

Principle 10

Society Faces a Short-Run Trade-off Between Inflation and Unemployment

  • The Phillips Curve (short run).

  • Policies can reduce unemployment temporarily at the cost of higher inflation.