Chapter 1
1 TEN PRINCIPLES OF
ECONOMICS
WHAT’S NEW IN THE EIGHTH EDITION:
There is a new case study “Adam Smith Would Have Loved Uber.”
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
that economics is about the allocation of scarce resources.
that individuals face trade-offs.
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.
1
© 2018 Cengage Learning®. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
, 2 ❖ Chapter 1/Ten Principles of Economics
KEY POINTS:
The fundamental lessons about individual decision making are that people face trade-
offs 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.
The fundamental lessons about interactions among people are that trade and
interdependence can be mutually beneficial, that markets are usually a good way of
coordinating economic activity among people, and that the government can potentially
improve market outcomes by remedying a market failure or by promoting greater
economic equality.
The fundamental lessons about the economy as a whole are that productivity is the
ultimate source of improving living standards, that growth in the quantity of money is
the ultimate source of inflation, and that society faces a short-run trade-off between
inflation and unemployment.
CHAPTER OUTLINE:
I. Introduction
Begin by pointing out that economics is a subject that students must
confront in their daily lives. Point out that they already spend a great deal
of their time thinking about economic issues: changes in prices, buying
decisions, use of their time, concerns about employment, etc.
A. The word “economy” comes from the Greek word oikonomos meaning “one who
manages a household.”
B. Both households and economies face many decisions about how to allocate
resources.
C. Resources are scarce so they must be managed carefully.
You will want to start the semester 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
D. Definition of scarcity:
will be helpful the limited
to students nature
if you follow the of society’s
definitions resources.
provided in the text
as much as possible.
E. Definition of economics: the study of how society manages its scarce
resources.
Because most college freshmen and sophomores have limited experiences
with viewing the world from a cause-and-effect perspective, do not
underestimate
As howten
you discuss the challenging these
principles, makeprinciples
sure thatwill be for the
students student.
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
II. How People Makethroughout
completely Decisions the text.
A. Principle #1: People Face Trade-offs
© 2018 Cengage Learning®. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
1 TEN PRINCIPLES OF
ECONOMICS
WHAT’S NEW IN THE EIGHTH EDITION:
There is a new case study “Adam Smith Would Have Loved Uber.”
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
that economics is about the allocation of scarce resources.
that individuals face trade-offs.
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.
1
© 2018 Cengage Learning®. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
, 2 ❖ Chapter 1/Ten Principles of Economics
KEY POINTS:
The fundamental lessons about individual decision making are that people face trade-
offs 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.
The fundamental lessons about interactions among people are that trade and
interdependence can be mutually beneficial, that markets are usually a good way of
coordinating economic activity among people, and that the government can potentially
improve market outcomes by remedying a market failure or by promoting greater
economic equality.
The fundamental lessons about the economy as a whole are that productivity is the
ultimate source of improving living standards, that growth in the quantity of money is
the ultimate source of inflation, and that society faces a short-run trade-off between
inflation and unemployment.
CHAPTER OUTLINE:
I. Introduction
Begin by pointing out that economics is a subject that students must
confront in their daily lives. Point out that they already spend a great deal
of their time thinking about economic issues: changes in prices, buying
decisions, use of their time, concerns about employment, etc.
A. The word “economy” comes from the Greek word oikonomos meaning “one who
manages a household.”
B. Both households and economies face many decisions about how to allocate
resources.
C. Resources are scarce so they must be managed carefully.
You will want to start the semester 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
D. Definition of scarcity:
will be helpful the limited
to students nature
if you follow the of society’s
definitions resources.
provided in the text
as much as possible.
E. Definition of economics: the study of how society manages its scarce
resources.
Because most college freshmen and sophomores have limited experiences
with viewing the world from a cause-and-effect perspective, do not
underestimate
As howten
you discuss the challenging these
principles, makeprinciples
sure thatwill be for the
students student.
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
II. How People Makethroughout
completely Decisions the text.
A. Principle #1: People Face Trade-offs
© 2018 Cengage Learning®. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
