PRINCIPLES

OF
ECONOMICS
Dr. Sherif M. Fathy
Table of Contant

- Course Description
- Grades
- Main Book
- Chapter (1) Ten Principles of Economics
Course Description

Principles of Economics is a course that introduces the

fundamentals of microeconomics and macroeconomic
analysis. The course is designed to introduce participants to
the way of economic thinking and learn about the basic
economic principles.
The course helps students to understand the economic world
around them. It covers both microeconomics, which is the
study of individual decision-making units such as households
and firms, and macroeconomics, which is the study of the
economy as a whole.
 Grades

-Before Mid Term

Assessment 1 = 5 Degree Mid term = 25 Degree
Quiz 1 = 5 Degree

participation = 5 Degree -After Mid Term

Assessment 2 = 5 Degree
Final Exam = 50 Degree Quiz 2 = 5 Degree
 PRINCIPLES OF

Economics
N. Gregory Mankiw
 CHAPTER (1)

TEN PRINCIPLES OF ECONOMICS

In this chapter,
look for the answers to these questions:

- What kinds of questions does economics address?

- What are the principles of how people make decisions?

- What are the principles of how people interact?
- What are the principles of how the economy as a whole works?
What Economics Is All About
- Scarcity: the limited nature of society’s resources
- Economics: the study of how society manages its scarce
resources, e.g.
- how people decide what to buy,
- how much to work, save, and spend
- how firms decide how much to produce,
- how many workers to hire
- how society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other
needs

8 TEN PRINCIPLES OF ECONOMICS

Q..
Economics is best defined as the study of ….
a) how society manages its scarce resources.
b) how to run a business most profitably.
c) how to predict inflation, unemployment, and stock prices.
d) how the government can stop the harm from unchecked
self-interest.
HOW PEOPLE MAKE DECISIONS
Principle 1: People Face Tradeoffs

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.

11 TEN PRINCIPLES OF ECONOMICS

Principle 1: People Face Tradeoffs
- Society faces an important tradeoff:
efficiency vs. equality
- Efficiency: when society gets the most from its
scarce resources
- Equality: when prosperity is distributed uniformly
among society’s members
- 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.”
12 TEN PRINCIPLES OF ECONOMICS
Principle 2: The Cost of Something Is
What You Give Up to Get It

- Making decisions requires comparing the costs

and benefits of alternative choices.
- The opportunity cost of any item is
whatever must be given up to obtain it.
- It is the relevant cost for decision making.

13 TEN PRINCIPLES OF ECONOMICS

Principle 2: The Cost of Something Is
What You Give Up to Get It

Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.

14 TEN PRINCIPLES OF ECONOMICS

Principle 3: Rational People Think at the Margin

Rational people
- systematically and purposefully do the best
they can to achieve their objectives.
- make decisions by evaluating costs and
benefits of marginal changes – incremental
adjustments to an existing plan.

15 TEN PRINCIPLES OF ECONOMICS

Principle 3: Rational People Think at the Margin

Examples:
- When a student considers whether to go to college for an
additional year, he compares the fees & foregone wages
to the extra income
he could earn with the extra year of education.
- When a manager considers whether to increase output,
she compares the cost of the needed labor and materials
to the extra revenue.

16 TEN PRINCIPLES OF ECONOMICS

Principle 4: People Respond to Incentives

- Incentive: something that induces a person to act, i.e.

the prospect of a reward or punishment.
- Rational people respond to incentives.
Examples:
- When gas prices rise, consumers buy more hybrid
cars and fewer gas guzzling SUVs.
- When cigarette taxes increase,
teen smoking falls.
17 TEN PRINCIPLES OF ECONOMICS
 PRINCIPLES OF

HOW PEOPLE INTERACT

Principle 5: Trade Can Make Everyone Better Off

- Rather than being self-sufficient,

people can specialize in producing one good or
service and exchange it for other goods.
- Countries also benefit from trade & specialization:
- Get a better price abroad for goods they produce
- Buy other goods more cheaply from abroad than
could be produced at home

19 TEN PRINCIPLES OF ECONOMICS

Principle 6: Markets Are Usually A Good Way to
Organize Economic Activity

- Market: a group of buyers and sellers

(need not be in a single location)
- “Organize economic activity” means determining
- what goods to produce
- how to produce them
- how much of each to produce
- who gets them

20 TEN PRINCIPLES OF ECONOMICS

Principle 6: Markets Are Usually A Good Way to
Organize Economic Activity

- A market economy allocates resources through the

decentralized decisions of many households and firms
as they interact in markets.
- Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.

21 TEN PRINCIPLES OF ECONOMICS

Principle 6: Markets Are Usually A Good Way to
Organize Economic Activity

- The invisible hand works through the price system:

- The interaction of buyers and sellers
determines prices.
- Each price reflects the good’s value to buyers 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.
22 TEN PRINCIPLES OF ECONOMICS
Principle 7: Governments Can Sometimes Improve
Market Outcomes

- Important role for govt: enforce property rights

(with police, courts)
- People are less inclined to work, produce, invest,
or purchase if large risk of their property being
stolen.

23 TEN PRINCIPLES OF ECONOMICS

Principle 7: Governments Can Sometimes Improve
Market Outcomes

- Market failure: when the market fails to allocate society’s

resources efficiently
- Causes:
- Externalities, when the production or consumption
of a good affects bystanders (e.g. pollution)
- Market power, a single buyer or seller has substantial
influence on market price (e.g. monopoly)
- In such cases, public policy may promote efficiency.
24 TEN PRINCIPLES OF ECONOMICS
Principle 7: Governments Can Sometimes Improve
Market Outcomes

- Govt may alter market outcome to promote equity

- If the market’s distribution of economic well-being

is not desirable, tax or welfare policies can change
how the economic “pie” is divided.

25 TEN PRINCIPLES OF ECONOMICS

 PRINCIPLES OF

HOW THE ECONOMY AS A WHOLE

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

- Huge variation in living standards across countries and

over time:
- 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.

27 TEN PRINCIPLES OF ECONOMICS

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

- The most important determinant of living standards:

productivity, the amount of goods and services produced per
unit of labor.
- Productivity depends on the equipment, skills, and technology
available to workers.
- Other factors (e.g., labor unions, competition from abroad)
have far less impact on living standards.

28 TEN PRINCIPLES OF ECONOMICS

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

- Inflation: increases in the general level of prices.

- In the long run, inflation is almost always caused
by excessive growth in the quantity of money,
which causes the value of money to fall.
- The faster the govt creates money,
the greater the inflation rate.

29 TEN PRINCIPLES OF ECONOMICS

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

- In the short-run (1 – 2 years),

many economic policies push inflation and
unemployment in opposite directions.
- Other factors can make this tradeoff more or
less favorable, but the tradeoff is always
present.

30 TEN PRINCIPLES OF ECONOMICS

 TABLE 1
TEN
PRINCIPLES
OF
ECONOMICS