1. Lecture Notes: Econ 203 Introductory Microeconomics Lecture/Chapter 1: 10 Economic Principles M. Cary Leahey Manhattan College Fall 2012

2. The nature of economics; what is economics all about
Allocation of scarce resources
Households; decisions to work, save and spend
Firms: produce, hire/fire, and distribute those goods
Society: dividing those resources

3. Principle 1: Tradeoffs
Guns versus butter
Equity versus efficiency

4. Principle 2: Opportunity costs
What you give up to get
Relevant “cost” of decisionmaking

5. Principle 3: Rational thinking is at the margin
Rational people go the best they can with what they have
Make incremental “marginal” decisions to existing plans
“Marginal” returns outweigh the “marginal” costs

6. Principle 4: Incentives
Rational people respond to incentives
Internalize the externalities
Incentives don’t always work according to plan (Mankiw’s seat belt example)

7. Principle 5: Trade Can Benefit All
Self-sufficiency has its limits
Absolute versus comparative advantage
Winners pay off the losers

8. Principle 6: Markets work best
Market, a group of buyers and sellers
Organized activity in markets: what/how/how much/who gets
Market economy, decentralized decisions of households and firms
Reliance on price mechanism
Smith’s invisible hand
Markets better at production than distribution
Private wealth/public squalor

9. Principle 7: Market problems/failure: the role for govt.
Externalities/market power/market failure open role for government
Govt. can: Enforce property rights (Chicago dictum)
Govt. Can: Promote efficiency/distribute the pie “better”
Internalize the externality

10. Principle 8: Standard of living is material well being
Well being can be measured by GDP
Wide variation in living standards across time and countries
Standard of living depends on productivity-capital, labor, skills, and organization

11. Principle 9: Inflation is a monetary phenomenon
Relative versus absolute prices
Changes in relative prices (beef/chicken)
Changes in absolute prices (inflation)
Change in the change (change in inflation)
Money/inflation link works with 10-year averages (Friedman)

12. Principle 10: Output inflation tradeoff
In short-run, output (unemployment) and inflation can move in opposite directions—a tradeoff (the case for Keynesian “fine tuning”)
In long-run, there is no tradeoff at full employment (the divine coincident according to Blanchard)