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TEN PRINCIPLES OF ECONOMICS

Chapter 1

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ECONOMY
From the Greek for one who manages a household. Key concept: scarcity.

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Definition
Economics: the study of how society manages its scarce resources.
Mankiw summarizes all of economics with 10 principles

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1. People face trade-offs.

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2. The cost of something is what you give up to get it.

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3. Rational people think at the margin.

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4. People respond to incentives.

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5. Trade can make everyone better off.

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6. Markets are usually a good way to organize economic activity.

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Governments can sometimes improve market outcomes.

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8. A countrys standard of living depends on its ability to produce goods and services.

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

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

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Economists as Advisors
Harry Truman said he wanted a one-armed economist.

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Ten Things Economists Agree On


1. A ceiling on rents reduces the quantity and quality of housing available. (93%) 2. Tariffs and import quotas usually reduce general economic welfare. (93%) 3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%) 4. Fiscal policy has a significant stimulative impact on a less than fully employed economy. (90%)
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5. If the federal budget deficit is to be balanced, it should be done over the business cycle rather than yearly. (85%) 6. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%) 7. A large federal budget deficit has an adverse effect on the economy. (83%) 8. A minimum wage increases unemployment among young and unskilled workers. (79%)
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9. The government should restructure the welfare system along the lines of a negative income tax. (79%) 10. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

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Thinking Like an Economist


Chapter 2

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Scientific Methodology
The whole of science is nothing more than the refinement of everday thinking. --Albert Einstein

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Observation Theory More Observation

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Role of Assumptions
A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Lets build a fire and heat the can first." The economist says, "Lets assume that we have a can-opener... --Paul Samuelson

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The Production Possibilities Frontier

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A Shift in the Production Possibilities Frontier

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The Circular Flow

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Microeconomics vs. Macroeconomnics


Micro: the study of how households and firms make decisions and how they interact in markets.
Macro: the study of economy-wide phenomena, including inflation, unemployment and growth
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Positive vs. Normative Statements


Positive statements: claims that attempt to describe the world as it is.
Normative statements: claims that attempt to prescribe how the world should be.

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Figure A-1 Types of Graphs

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Figure A-2 Using the Coordinate System

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Table A-1 Novels Purchased by Emma

Copyright2003 Southwestern/Thomson Learning

Figure A-3 Demand Curve

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Figure A-4 Shifting Demand Curves

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Figure A-5 Calculating the Slope of a Line

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Figure A-6 Graph with an Omitted Variable

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Figure A-7 Graph Suggesting Reverse Causality

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