Ten Principles of Microeconomics - Chapter 1 (Mankiw, 10th Edition)

Flashcards covering Chapter 1 concepts from Mankiw's Principles of Microeconomics (10th ed.): scarcity, opportunity costs, marginal thinking, incentives, trade, markets, government role, productivity, inflation, and short-run trade-offs.

What is scarcity?

The limited nature of society’s resources.

What is economics?

The study of how society manages its scarce resources.

What are the three broad areas of principles covered in this chapter?

How people make decisions, how people interact, and how the economy as a whole works.

Principle 1: What does it mean that people face trade-offs?

To get one thing you want, you usually must give up another.

Principle 2: How is the cost of something defined?

The cost of something is what you give up to obtain it (opportunity costs).

Principle 3: How do rational people make decisions?

Rational people think at the margin, evaluating marginal costs and benefits.

Principle 4: How do incentives affect behavior?

People respond to incentives; incentives induce actions and rational people weigh costs and benefits.

What is an incentive?

Something that induces a person to act.

What is a marginal change?

A small incremental adjustment to a plan of action.

Opportunity cost example: Going to college for a year

Tuition, books, and fees plus foregone earnings.

Opportunity cost example: Going to the movies

The price of the ticket plus the value of the time spent in the theater.

Principle 3: Marginal analysis in decision making

Rational people evaluate marginal costs and marginal benefits when making decisions.

Principle 4: Incentives and behavior

Incentives influence actions; higher costs or rewards change choices.

Incentives example: Gasoline tax

Encourages fuel-efficient or alternate-transport choices (driving less, switching to alternatives).

Principle 5: Trade can make everyone better off

Trade lets people specialize and enjoy a greater variety of goods at lower cost; countries benefit from specialization.

Principle 6: Markets are usually a good way to organize economic activity

Markets allocate resources through decentralized decisions; prices reflect value and cost; the 'invisible hand' guides outcomes.

What is a market economy?

An economy that allocates resources through the decentralized decisions of many firms and households.

What is Adam Smith’s invisible hand?

Prices adjust to guide market participants toward outcomes that maximize societal well-being.

Principle 7: Government can sometimes improve market outcomes

Governments enforce property rights, address market failures (externalities, market power), and promote equality.

What is an externality?

A side effect of an activity that affects bystanders; can be positive or negative (e.g., pollution).

What is market power?

A single buyer or seller has substantial influence on market price (monopoly).

Principle 8: Productivity and a country’s standard of living

Standard of living depends on the ability to produce goods and services; productivity is key.

What is productivity?

Quantity of goods and services produced per unit of labor input; depends on equipment, skills, and technology.

Principle 9: Inflation and money supply

Prices rise when the government prints too much money; inflation is an overall price rise.

What causes long-run inflation?

Excessive growth in the quantity of money in the economy.

Principle 10: Short-run trade-off between inflation and unemployment

In the short run, policies can push inflation and unemployment in opposite directions; the trade-off is often present.

Parking permit price change thought experiment (Think-Pair-Share)

Lower price increases demand; time to find a parking place may rise; true cost of parking is not necessarily lower; opportunity cost differs by employment status.