Ten Principles of Macroeconomics - Chapter 1 (Mankiw)

A set of QA-style flashcards covering the Ten Principles of Macroeconomics from Chapter 1 slides.

What does scarcity mean in economics?

The limited nature of society's resources; society cannot produce all the goods and services people want.

What is economics as a field of study?

The study of how society manages its scarce resources.

What four broad questions does economics answer?

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

Principle 1: People face trade-offs

To get one thing you want, you must give up another; making decisions involves trading off one goal for another.

EXAMPLE of trade-offs: guns vs butter

More spending on military (guns) means less on consumer goods (butter), affecting living standards.

EXAMPLE of trade-offs: efficiency vs equality

Greater equality via redistribution can reduce incentives and the size of the economic pie.

Principle 2: The cost of something is what you give up to get it

The opportunity cost; what you must sacrifice to obtain a good or service.

Opportunity cost example: going to college for a year

Tuition, books, fees, plus foregone earnings (room and board may also be affected).

Opportunity cost example: going to the movies

The price of the ticket plus the value of the time spent watching the movie.

Principle 3: Rational people think at the margin

Rational people compare marginal costs and benefits and make small, incremental changes.

Active Learning 1 (margin decision): hire a cashier

Marginal benefit $400/week; marginal cost $300/week; hire because MB > MC.

Active Learning 1 (margin decision): watch Disney Plus

Marginal benefit is enjoyment; marginal monetary cost is $0; decision depends on whether MB > time cost.

Principle 4: People respond to incentives

Incentives induce action; rational people respond to costs and benefits; price changes influence behavior.

Example: doughnut price increase

Higher price reduces quantity demanded and may increase supply as producers respond to higher revenue.

Example: gasoline tax incentives

Higher gasoline tax encourages fuel-efficient cars, carpooling, and alternative transport.

Principle 5: Trade can make everyone better off

Trade allows more variety and lower costs; countries specialize and gain from exchange.

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

Markets allocate resources through decentralized decisions of buyers and sellers guided by prices.

Adam Smith’s invisible hand

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

Principle 7: Governments can sometimes improve market outcomes

Governments enforce property rights, address market failures, and promote equality when appropriate.

Externalities

A consequence of production or consumption affecting bystanders (e.g., pollution) not reflected in market prices.

Market power

A single buyer or seller can influence prices (e.g., monopoly), causing market failures.

Principle 8: A country’s standard of living depends on its ability to produce goods and services

Productivity is the main determinant; influenced by capital, technology, and labor skills.

Principle 9: Prices rise when the government prints too much money

Inflation; caused in the long run by growth in the money supply.

Principle 10: Society faces a short-run trade-off between inflation and unemployment

In the short run, policies may push inflation and unemployment in opposite directions; the trade-off persists.

What is productivity?

Output per unit of input; a key determinant of living standards.

What determines a country’s living standards in the long run?

Productivity growth driven by technology, skills, and resources per worker.