N. Gregory Mankiw's Principles of Economics: Ten Core Principles with Key Examples

N. Gregory Mankiw's Principles of Economics

With Key Cases and Examples from the Book

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• Introduction to Mankiw's Book
• Principles 1-4: How People Make Decisions
• Principles 5-7: How People Interact
• Principles 8-10: How the Economy as a Whole Works
• Key Takeaways and Conclusion

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1

Mankiw's Principles of Economics

Overview of the Book and Its Ten Core Principles

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• 'Principles of Economics' by N. Gregory Mankiw (first published 1997)
• Most widely used introductory economics textbook worldwide
• Ten principles organize all of economics
• Each principle illustrated with real-world examples and cases
• Note: Free account limits to 20 slides (requested 25); comprehensive coverage of all 10 principles provided

> Economics is the study of how society manages its scarce resources.

— N. Gregory Mankiw

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2

How People Make Decisions

Individual Decision-Making Fundamentals

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• To get one thing, we usually have to give up another
• Efficiency vs. equity trade-off
• Case: National production - more guns (defense) means less butter (consumer goods)
• Case: Seatbelt laws - saves lives but reduces personal freedom

• Classic PPF diagram from Mankiw
• Points inside curve: inefficient
• On curve: efficient but trade-offs

• Cost of something = what you give up to get it
• Includes explicit (money) and implicit (time) costs
• Case: College - tuition + forgone wages (~$20K/year)
• Case: Farmer's 1 hour: 2 bushels corn or 4 quarts strawberries

• Marginal change: extra benefit/cost of one more unit
• Compare marginal benefit vs. marginal cost
• Case: Factory - produce one more car if revenue > cost
• Case: Study one more hour if exam improvement > free time value

• Incentive: something that induces change in behavior
• Well-designed incentives key to policy
• Case: Higher cigarette tax → fewer smokers
• Case: Mandatory seatbelts → more driving (moral hazard), higher speed limits → more accidents

3

How People Interact

Benefits of Trade and Markets

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• Trade allows specialization based on comparative advantage
• Even if one more productive in everything
• Case: Two people - Tom (better at both food/cloth) trades with Jane
• Outcome: Both consume more than alone

• Tom: 20 oz food/hr, 40 yd cloth/hr
• Jane: 10 oz food/hr, 20 yd cloth/hr
• Tom specializes in cloth, Jane food → mutual gains

• Market economy: households/firms interact via markets
• Adam Smith's 'invisible hand' → promotes social good
• Case: Restaurant allocates scarce tables to diners who value most

• Markets fail: externalities, market power
• Gov enforces property rights, corrects failures
• Case: Pollution externality → Pigovian tax on factories
• Case: Monopoly → antitrust laws

4

How the Economy as a Whole Works

Macroeconomic Perspectives

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• Productivity: goods/services per hour worked
• Almost sole determinant of living standards
• Case: U.S. vs. Mexico: higher productivity → higher wages ($30/hr vs. $3/hr)
• Boost via human capital, tech, resources

• Inflation: increase in overall price level
• Caused by growth in money supply > economic growth
• Case: Hyperinflation in Germany 1920s, Zimbabwe 2000s
• One-time money increase → one-time inflation, not ongoing

• Phillips curve: higher inflation → lower unemployment short-run
• Expansionary policy shifts curve
• Long-run: vertical at natural unemployment rate
• Case: 1960s U.S. policy experiments