Chapter 1
1 TEN PRINCIPLES OF
ECONOMICS
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
that economics is about the allocation of scarce resources.
that individuals face tradeoffs.
the meaning of opportunity cost.
how to use marginal reasoning when making decisions.
how incentives affect people’s behavior.
why trade among people or nations can be good for everyone.
why markets are a good, but not perfect, way to allocate resources.
what determines some trends in the overall economy.
CONTEXT AND PURPOSE:
Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to
the text. Chapter 1 introduces ten fundamental principles on which the study of
economics is based. In a broad sense, the rest of the text is an elaboration on these ten
principles. Chapter 2 will develop how economists approach problems while Chapter 3
will explain how individuals and countries gain from trade.
The purpose of Chapter 1 is to lay out ten economic principles that will serve as
building blocks for the rest of the text. The ten principles can be grouped into three
categories: how people make decisions, how people interact, and how the economy
works as a whole. Throughout the text, references will be made repeatedly to these ten
principles.
KEY POINTS:
1. The fundamental lessons about individual decisionmaking are that people face
tradeoffs among alternative goals, that the cost of any action is measured in terms of
forgone opportunities, that rational people make decisions by comparing marginal
costs and marginal benefits, and that people change their behavior in response to the
incentives they face.
1
,2 Chapter 1/Ten Principles of Economics
2. The fundamental lessons about interactions among people are that trade can be
mutually beneficial, that markets are usually a good way of coordinating trades
among people, and that the government can potentially improve market outcomes if
there is some sort of market failure or if the market outcome is inequitable.
3. The fundamental lessons about the economy as a whole are that productivity is the
ultimate source of living standards, that money growth is the ultimate source of
inflation, and that society faces a short-run tradeoff between inflation and
unemployment.
CHAPTER OUTLINE:
I. Introduction
Begin by pointing out that economics is a subject that students must
confront in their everyday lives. Point out that they already spend a great
deal of their time thinking about economic issues: prices, buying decisions,
use of their time, etc.
A. The word “economy” comes from the Greek word meaning “one who
manages a household.”
B. This makes some sense since in the economy we are faced with many
decisions (just as a household is).
C. Fundamental economic problem: resources are scarce.
You will want to start the school academic term by explaining to students
that part of learning economics is understanding a new vocabulary.
Economists generally use very precise (and sometimes different) definitions
for words that are commonly used outside of the economics discipline.
Therefore, it will be helpful to students if you follow the definitions provided
in the text as much as possible.
D. Definition of scarcity: the limited nature of society’s resources to
meet unlimited wants. (Note that the textbook only includes the limited
nature of society’s resources in the definition and you will need to
emphasize the part in red).
E. Definition of economics: the study of how society manages its
scarce resources.
Because most junior college students in their first year have limited
experiences with viewing the world from a cause-and-effect perspective, do
not underestimate how challenging these principles will be for the student.
As you discuss the ten principles, make sure that students realize that it is
okay if they do not grasp each of the concepts completely or find each of
the arguments fully convincing. These ideas will be explored more
completely throughout the text.
II. How People Make Decisions
A. Principle #1: People Face Tradeoffs
, Chapter 1/Ten Principles of Economics 3
1. “There is no such thing as a free lunch.” Making decisions requires
trading off one goal for another.
2. Examples include how a student spends her time, how a family
decides to spend its income, how the Singapore government
spends tax dollars, how regulations may protect the environment at
a cost to firm owners.
3. A special example of a tradeoff is the tradeoff between efficiency
and equity.
a. Definition of efficiency: the property of society getting
the most it can from its scarce resources.
b. Definition of equity: the property of distributing
economic prosperity fairly among the members of
society.
c. For example, tax dollars paid by wealthy Singaporeans and
then distributed to those less fortunate may improve equity
but lower the return to hard work and therefore reduce the
level of output produced by our resources.
d. This implies that the cost of this increased equity is a
reduction in the efficient use of our resources.
4. Recognizing that tradeoffs exist does not indicate what decisions
should be made.
B. Principle #2: The Cost of Something Is What You Give Up to Get It
1. Making decisions requires individuals to consider the benefits and
costs of some action.
2. What are the costs of going to college?
a. We cannot count room and board (at least all of the cost)
because the person would have to pay for food and shelter
even if he was not in school.
b. We would want to count the value of the student’s time
since he could be working for pay instead of attending
classes and studying.
3. Definition of opportunity cost: whatever must be given up to
obtain some item.
One of the hardest ideas for students to grasp is that “free” things are not
truly free. Thus, you will need to provide students with numerous examples
of such “free” things with hidden costs, especially the value of time. For
instance, “free” cars won in lucky draws, “free” use of public toilets, etc.
C. Principle #3: Rational People Think at the Margin
1. Many decisions in life involve incremental decisions: Should I
remain in school this academic term? Should I take another H2
module in economics? Should I study an additional hour for
tomorrow’s exam?
1 TEN PRINCIPLES OF
ECONOMICS
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
that economics is about the allocation of scarce resources.
that individuals face tradeoffs.
the meaning of opportunity cost.
how to use marginal reasoning when making decisions.
how incentives affect people’s behavior.
why trade among people or nations can be good for everyone.
why markets are a good, but not perfect, way to allocate resources.
what determines some trends in the overall economy.
CONTEXT AND PURPOSE:
Chapter 1 is the first chapter in a three-chapter section that serves as the introduction to
the text. Chapter 1 introduces ten fundamental principles on which the study of
economics is based. In a broad sense, the rest of the text is an elaboration on these ten
principles. Chapter 2 will develop how economists approach problems while Chapter 3
will explain how individuals and countries gain from trade.
The purpose of Chapter 1 is to lay out ten economic principles that will serve as
building blocks for the rest of the text. The ten principles can be grouped into three
categories: how people make decisions, how people interact, and how the economy
works as a whole. Throughout the text, references will be made repeatedly to these ten
principles.
KEY POINTS:
1. The fundamental lessons about individual decisionmaking are that people face
tradeoffs among alternative goals, that the cost of any action is measured in terms of
forgone opportunities, that rational people make decisions by comparing marginal
costs and marginal benefits, and that people change their behavior in response to the
incentives they face.
1
,2 Chapter 1/Ten Principles of Economics
2. The fundamental lessons about interactions among people are that trade can be
mutually beneficial, that markets are usually a good way of coordinating trades
among people, and that the government can potentially improve market outcomes if
there is some sort of market failure or if the market outcome is inequitable.
3. The fundamental lessons about the economy as a whole are that productivity is the
ultimate source of living standards, that money growth is the ultimate source of
inflation, and that society faces a short-run tradeoff between inflation and
unemployment.
CHAPTER OUTLINE:
I. Introduction
Begin by pointing out that economics is a subject that students must
confront in their everyday lives. Point out that they already spend a great
deal of their time thinking about economic issues: prices, buying decisions,
use of their time, etc.
A. The word “economy” comes from the Greek word meaning “one who
manages a household.”
B. This makes some sense since in the economy we are faced with many
decisions (just as a household is).
C. Fundamental economic problem: resources are scarce.
You will want to start the school academic term by explaining to students
that part of learning economics is understanding a new vocabulary.
Economists generally use very precise (and sometimes different) definitions
for words that are commonly used outside of the economics discipline.
Therefore, it will be helpful to students if you follow the definitions provided
in the text as much as possible.
D. Definition of scarcity: the limited nature of society’s resources to
meet unlimited wants. (Note that the textbook only includes the limited
nature of society’s resources in the definition and you will need to
emphasize the part in red).
E. Definition of economics: the study of how society manages its
scarce resources.
Because most junior college students in their first year have limited
experiences with viewing the world from a cause-and-effect perspective, do
not underestimate how challenging these principles will be for the student.
As you discuss the ten principles, make sure that students realize that it is
okay if they do not grasp each of the concepts completely or find each of
the arguments fully convincing. These ideas will be explored more
completely throughout the text.
II. How People Make Decisions
A. Principle #1: People Face Tradeoffs
, Chapter 1/Ten Principles of Economics 3
1. “There is no such thing as a free lunch.” Making decisions requires
trading off one goal for another.
2. Examples include how a student spends her time, how a family
decides to spend its income, how the Singapore government
spends tax dollars, how regulations may protect the environment at
a cost to firm owners.
3. A special example of a tradeoff is the tradeoff between efficiency
and equity.
a. Definition of efficiency: the property of society getting
the most it can from its scarce resources.
b. Definition of equity: the property of distributing
economic prosperity fairly among the members of
society.
c. For example, tax dollars paid by wealthy Singaporeans and
then distributed to those less fortunate may improve equity
but lower the return to hard work and therefore reduce the
level of output produced by our resources.
d. This implies that the cost of this increased equity is a
reduction in the efficient use of our resources.
4. Recognizing that tradeoffs exist does not indicate what decisions
should be made.
B. Principle #2: The Cost of Something Is What You Give Up to Get It
1. Making decisions requires individuals to consider the benefits and
costs of some action.
2. What are the costs of going to college?
a. We cannot count room and board (at least all of the cost)
because the person would have to pay for food and shelter
even if he was not in school.
b. We would want to count the value of the student’s time
since he could be working for pay instead of attending
classes and studying.
3. Definition of opportunity cost: whatever must be given up to
obtain some item.
One of the hardest ideas for students to grasp is that “free” things are not
truly free. Thus, you will need to provide students with numerous examples
of such “free” things with hidden costs, especially the value of time. For
instance, “free” cars won in lucky draws, “free” use of public toilets, etc.
C. Principle #3: Rational People Think at the Margin
1. Many decisions in life involve incremental decisions: Should I
remain in school this academic term? Should I take another H2
module in economics? Should I study an additional hour for
tomorrow’s exam?
