Mankiw - Chapter_01 & 02

Mankiw Chapter_01 - Chapter 1 Ten Principles of Economics 1.1 Introduction The word economy comes from the Greek word oikonomos(one who manages a

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1 Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics Chapter 1 Ten Principles of Economics 1.1 Introduction z The word economy comes from the Greek word oikonomos (“one who manages a household.”) z A household faces many decisions: Why? – it decides how to allocate its scarce resources. z Society also faces many decisions: the management of society’s resources is important because resources are scarce. ± Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. z Economics is the study of how society manages its scarce resources. 1.2 How people make decisions Principle 1: People face trade-offs . z Making decisions requires trading off one goal against another. z Trade-offs faced by societies: ‘Guns and butter’, clean environment and a high level of income, efficiency and equity ± Efficiency: the property of society getting the most it can from its scarce resources ± Equity: the property of distributing economic prosperity fairly among the members of society z Recognizing that people face trade-offs does not by itself tell us what decisions they will or should make. z Acknowledging life’s trade-offs is important because people are likely to make good decisions only if they understand the options that they have available. Principle 2: The cost of something is what you give up to get it. z Because people face trade-offs, making decisions require comparing the costs and benefits of alternative courses of action. z Opportunity cost: whatever must be given up to obtain some item
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2 Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics ± When making any decision, decision makers should be aware of the opportunity costs that accompany each possible action. Principle 3: Rational people think at the margin z Economists normally assume that people are rational. ± Rational people: people who systematically and purposefully do the best they can to achieve their objectives. z Rational consumers who buy a bundle of goods and services to achieve the highest possible level of satisfaction, subject to their incomes and the prices of those goods and services. z Rational firms that decide how many workers to hire and how much of their product to manufacture and sell to maximize profits. z Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action. ± Rational people often make decisions by comparing marginal benefits and marginal costs. ± Marginal decision making can help explain some puzzling economic phenomena: a paradox of water and a diamond – Why is water so cheap, while diamonds are so expensive? z
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This note was uploaded on 04/05/2010 for the course ECONOMICS 2009 taught by Professor Lee during the Spring '09 term at Yonsei University.

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Mankiw Chapter_01 - Chapter 1 Ten Principles of Economics 1.1 Introduction The word economy comes from the Greek word oikonomos(one who manages a

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