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N. Gregory Nankiw
1901)
‐ Born February 3, 1958, married, 3 children.
(1831
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A.B., summa cum laude in economics,
CHAPTER Ten Principles Princeton University, 1980. (22)
1 Ph.D., Department of Economics, M.I.T.,
of Economics 1984. (26)
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TEN PRINCIPLES OF ECONOMICS 1
Council of Economic Advisers, Staff What Economics Is All About
Economist, 1982-1983. (24) ( ): the limited nature of society’s
Massachusetts Institute of Technology, resources
Instructor, 1984-1985. (26) ( ): the study of how society
Harvard University, Assistant Professor, manages its scarce resources, e.g.
1985-1987. (27) how people decide what to buy,
Council of Economic Advisers, Chairman, how much to work, save, and spend
2003-2005. (45) how firms decide how much to produce,
Harvard University, Professor of how many workers to hire
Economics, 1987-present. (29) how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
TEN PRINCIPLES 2 3
OF ECONOMICS
The principles of PRINCIPLE 1
HOW PEOPLE People Face ( )
MAKE DECISIONS All decisions involve tradeoffs. Examples:
Going to a party the night before your midterm
leaves less time for studying.
Having more money to buy stuff requires
working longer hours, which leaves less time
for leisure.
Protecting the environment requires resources
that could otherwise be used to produce
consumer goods.
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PRINCIPLE 1 PRINCIPLE 2
People Face Tradeoffs The Cost of Something Is
Society faces an important tradeoff: What You Give Up to Get It
efficiency vs. equality Making decisions requires comparing the costs
( ): when society gets the most from and benefits of alternative choices.
its scarce resources The ( ) of any item is
( ): when prosperity is distributed whatever must be given up to obtain it.
uniformly among society’s members It is the relevant cost for decision making.
Tradeoff: To achieve greater equality,
could redistribute income from wealthy to poor.
But this reduces incentive to work and produce,
shrinks the size of the economic “pie.”
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PRINCIPLE 2 PRINCIPLE 3
The Cost of Something Is Rational People Think at the Margin
What You Give Up to Get It ( )
Examples: systematically and purposefully do the best they
The opportunity cost of… can to achieve their objectives.
…going to college for a year is not just the tuition, make decisions by evaluating costs and benefits
books, and fees, but also the foregone wages. of marginal changes, incremental adjustments
…seeing a movie is not just the price of the ticket, to an existing plan.
but the value of the time you spend in the theater.
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PRINCIPLE 3 PRINCIPLE 4
Rational People Think at the Margin People Respond to Incentives
Examples: ( ): something that induces a person to
When a student considers whether to go to act, i.e. the prospect of a reward or punishment.
college for an additional year, he compares the Rational people respond to incentives.
fees & foregone wages to the extra income Examples:
he could earn with the extra year of education. When gas prices rise, consumers buy more
When a manager considers whether to increase hybrid cars and fewer gas guzzling SUVs.
output, she compares the cost of the needed When cigarette taxes increase,
labor and materials to the extra revenue. teen smoking falls.
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The principles of PRINCIPLE 5
HOW PEOPLE Trade Can Make Everyone Better Off
Rather than being self-sufficient,
INTERACT people can specialize in producing one good or
service and exchange it for other goods.
Countries also benefit from trade and
specialization:
Get a better price abroad for goods they
produce
Buy other goods more cheaply from abroad
than could be produced at home
©Pressmaster/Shutterstock.com
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PRINCIPLE 6 PRINCIPLE 6
Markets Are Usually A Good Way to Markets Are Usually A Good Way to
Organize Economic Activity Organize Economic Activity
( ): a group of buyers and sellers A market economy allocates resources through
(need not be in a single location) the decentralized decisions of many households
“Organize economic activity” means determining and firms as they interact in markets.
what goods to produce Famous insight by Adam Smith in
how to produce them The Wealth of Nations (1776):
how much of each to produce Each of these households and firms
who gets them acts as if “led by an invisible hand”
to promote general economic well-being.
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PRINCIPLE 6 PRINCIPLE 7
Markets Are Usually A Good Way to Governments Can Sometimes
Organize Economic Activity Improve Market Outcomes
The invisible hand works through the price Important role for govt: enforce property rights
system: (with police, courts)
The interaction of buyers and sellers People are less inclined to work, produce,
determines prices. invest, or purchase if large risk of their property
Each price reflects the good’s value to buyers being stolen.
and the cost of producing the good.
Prices guide self-interested households and
firms to make decisions that, in many cases,
maximize society’s economic well-being.
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PRINCIPLE 7 PRINCIPLE 7
Governments Can Sometimes Governments Can Sometimes
Improve Market Outcomes Improve Market Outcomes
( ): when the market fails to Govt may alter market outcome to
allocate society’s resources efficiently promote equity.
Causes of market failure: If the market’s distribution of economic well-being
( ), when the production or is not desirable, tax or welfare policies can
consumption change how the economic “pie” is divided.
of a good affects bystanders (e.g. pollution)
( ), a single buyer or seller has
substantial influence on market price
(e.g. monopoly)
Public policy may promote efficiency. 18 19
The principles of PRINCIPLE 8
HOW THE A Country’s Standard of Living Depends on Its
Ability to Produce Goods & Services
ECONOMY Huge variation in living standards across
AS A WHOLE countries and over time:
WORKS Average income in rich countries is more than
ten times average income in poor countries.
The U.S. standard of living today is about
eight times larger than 100 years ago.
©nopporn/Shutterstock.com
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PRINCIPLE 8 PRINCIPLE 9
A Country’s Standard of Living Depends on Its Prices Rise When the Government Prints Too
Ability to Produce Goods & Services Much Money
The most important determinant of living Inflation: increases in the general level of prices.
standards: productivity, the amount of goods In the long run, inflation is almost always caused
and services produced per unit of labor. by excessive growth in the quantity of money,
Productivity depends on the equipment, skills, which causes the value of money to fall.
and technology available to workers. The faster the govt creates money,
Other factors (e.g., labor unions, competition from the greater the inflation rate.
abroad) have far less impact on living standards.
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