Principles of Economics (Asia Pacific Edition) 9th Edition
Joshua Gans, Stephen King, Martin Byford, Gregory
Mankiw
(Solutions Manual All Chapters, 100% Original Verified A+
Grade)
Principles of Microeconomics
9th Edi�on
Solutions Manual
, Principles of Microeconomics – 9th edition
Chapter 1
Ten lessons from economics
Contents
Learning objectives ........................................................................................................................................... 2
Key points ......................................................................................................................................................... 2
Chapter outline .................................................................................................................................................. 2
Introduction ................................................................................................................................................... 2
How people make decisions .......................................................................................................................... 3
How people interact ...................................................................................................................................... 4
How the economy as a whole works............................................................................................................. 5
Conclusion .................................................................................................................................................... 6
Adjunct teaching tips and warm-up activities ................................................................................................... 6
Check your understanding solutions .................................................................................................................. 6
LO1.1 How people make decisions .......................................................................................................... 6
LO1.2 How people interact ....................................................................................................................... 7
LO1.3 How the economy as a whole works: ............................................................................................ 7
Case study solutions .......................................................................................................................................... 7
Choosing when the stork comes ................................................................................................................ 7
Apply and revise solutions................................................................................................................................ 7
Practice questions solutions .............................................................................................................................. 8
Multiple choice ............................................................................................................................................. 8
Problems and applications............................................................................................................................. 8
Copyright 2023 Cengage Learning Australia Pty Limited
1
, Principles of Microeconomics – 9th edition
Learning objectives
After reading this chapter, students should be able to:
• recognise that people face trade-offs when they make decisions, and discuss how the nature of these
trade-offs influences their behaviour
• explain why trade among people or nations can be good for everyone, and discuss why markets are a
good, but not perfect, way to allocate resources
• identify the factors that drive some significant trends in the overall economy.
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 behaviour in response to the incentives they face.
• The fundamental lessons about interactions among people are that trade can be mutually beneficial,
that markets are usually a good way of coordinating trade among people and that the government can
potentially improve market outcomes if there is some market failure or if the market outcome is
inequitable.
• 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 trade-off between inflation and unemployment.
Chapter outline
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.
• The word ‘economy’ comes from the Greek word oikonomos, meaning ‘one who manages a
household’. This makes some sense, since in the economy we are faced with many decisions (just
as a household is).
• The fundamental economic problem: resources are scarce.
You will want to start the semester by explaining to students that economics is by and
large a subject of logic; however, part of learning economics is understanding a new
vocabulary. In order to have a productive discourse, economists generally use very
precise (and sometimes different) definitions for words that are commonly used outside
of the economics discipline. The use of such precise language is common to other
disciplines. Therefore, it will be helpful to students if you follow the definitions provided
in the text as much as possible.
• Definition: scarcity – the limited nature of society’s resources.
• Definition: economics – the study of how society manages its scarce resources.
Do not underestimate how challenging these principles will be for the student because
most first-year university students have limited experience with viewing the world from
a cause-and-effect perspective. This is a good time to emphasise that there are known
reasons for why many things work the way they do in the real world. Although we
cannot predict the behaviour of any one individual, centuries of observation and
analysis have uncovered several general rules explaining the decisions and
behaviours of large numbers of individuals.
Copyright 2023 Cengage Learning Australia Pty Limited
2
, Principles of Microeconomics – 9th edition
How people make decisions
Principle 1: People face trade-offs
• ‘There is no such thing as a free lunch.’ Making decisions requires trading off one goal for another.
Examples include how a student spends their time, how a family decides to spend its income, how
the Australian government spends tax dollars and how regulations may protect the environment at a
cost to firm owners.
• A special example of a trade-off is the trade-off between efficiency and equity.
– Definition: efficiency – the property of society getting the most it can from its scarce resources.
Example: Wasting no resources when making a pie, so the pie becomes as large as possible.
– Definition: equity – the property of distributing economic prosperity fairly among the members
of society.
Example: How should the pie be distributed; that is, who will get a larger slice of the pie and
who will get a smaller slice, or will slices be distributed equally?
– While it is useful to strictly distinguish between efficiency and equity for analytical purposes,
these two concepts are also linked. For example, tax dollars paid by wealthy Australians and
then distributed to those less fortunate may improve equity but also may lower the incentive to
work hard and therefore reduce the level of output produced by our resources.
– This implies that the cost of increased equity is a reduction in the efficient use of resources.
Principle 2: The cost of something is what you give up to get it
• Making decisions requires individuals to consider the benefits and costs of alternative actions.
• Example: What are the costs of going to university?
– We cannot count the complete cost of room and board because the student would have to pay
for food and shelter even if they were not in school. These are part of the cost of living and not
part of the cost of studying.
– We would want to count the value of the student’s time since she could be working for pay
instead of attending classes and studying. Also on a very nice sunny day some students might
value the cost of attending classes much higher than on a rainy day.
• Definition: 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. So
you will need to provide students with numerous examples of ‘free’ things with hidden
costs, especially considering the value of time. The relevant opportunity cost is the
next best alternative, which might differ for each individual.
Principle 3: Rational people think at the margin
• Economists assume people are rational.
• Definition: rational people – people who systematically and purposefully do the beast they can to
achieve their objectives.
• Many decisions in life are incremental in nature: Should I remain in school this semester? Should I
take another course this semester?
• Definition: marginal change – a small incremental adjustment to a plan of action.
• Rational people often make decisions by comparing marginal benefits and marginal cost.
• Example: Decision of whether to watch another movie tonight. If you pay $16 a month for a streaming
service (and you typically watch eight movies a month), the marginal cost is zero – because you pay the
same $16 for the service regardless of how many movies you watch. The marginal cost instead would be
time it takes away from doing another activity; that is, working or reading a textbook.
• Example: Suppose that flying a 200-seat plane from Brisbane to Perth costs the airline $100 000, which
means that the average cost of each seat is $500. Suppose that the plane is minutes from departure,
there are several vacant seats and a passenger is willing to pay $300 for a seat. Should the airline sell
the seat for $300? As long as the marginal revenue exceeds the marginal cost, selling the ticket is
profitable.
Copyright 2023 Cengage Learning Australia Pty Limited
3
Joshua Gans, Stephen King, Martin Byford, Gregory
Mankiw
(Solutions Manual All Chapters, 100% Original Verified A+
Grade)
Principles of Microeconomics
9th Edi�on
Solutions Manual
, Principles of Microeconomics – 9th edition
Chapter 1
Ten lessons from economics
Contents
Learning objectives ........................................................................................................................................... 2
Key points ......................................................................................................................................................... 2
Chapter outline .................................................................................................................................................. 2
Introduction ................................................................................................................................................... 2
How people make decisions .......................................................................................................................... 3
How people interact ...................................................................................................................................... 4
How the economy as a whole works............................................................................................................. 5
Conclusion .................................................................................................................................................... 6
Adjunct teaching tips and warm-up activities ................................................................................................... 6
Check your understanding solutions .................................................................................................................. 6
LO1.1 How people make decisions .......................................................................................................... 6
LO1.2 How people interact ....................................................................................................................... 7
LO1.3 How the economy as a whole works: ............................................................................................ 7
Case study solutions .......................................................................................................................................... 7
Choosing when the stork comes ................................................................................................................ 7
Apply and revise solutions................................................................................................................................ 7
Practice questions solutions .............................................................................................................................. 8
Multiple choice ............................................................................................................................................. 8
Problems and applications............................................................................................................................. 8
Copyright 2023 Cengage Learning Australia Pty Limited
1
, Principles of Microeconomics – 9th edition
Learning objectives
After reading this chapter, students should be able to:
• recognise that people face trade-offs when they make decisions, and discuss how the nature of these
trade-offs influences their behaviour
• explain why trade among people or nations can be good for everyone, and discuss why markets are a
good, but not perfect, way to allocate resources
• identify the factors that drive some significant trends in the overall economy.
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 behaviour in response to the incentives they face.
• The fundamental lessons about interactions among people are that trade can be mutually beneficial,
that markets are usually a good way of coordinating trade among people and that the government can
potentially improve market outcomes if there is some market failure or if the market outcome is
inequitable.
• 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 trade-off between inflation and unemployment.
Chapter outline
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.
• The word ‘economy’ comes from the Greek word oikonomos, meaning ‘one who manages a
household’. This makes some sense, since in the economy we are faced with many decisions (just
as a household is).
• The fundamental economic problem: resources are scarce.
You will want to start the semester by explaining to students that economics is by and
large a subject of logic; however, part of learning economics is understanding a new
vocabulary. In order to have a productive discourse, economists generally use very
precise (and sometimes different) definitions for words that are commonly used outside
of the economics discipline. The use of such precise language is common to other
disciplines. Therefore, it will be helpful to students if you follow the definitions provided
in the text as much as possible.
• Definition: scarcity – the limited nature of society’s resources.
• Definition: economics – the study of how society manages its scarce resources.
Do not underestimate how challenging these principles will be for the student because
most first-year university students have limited experience with viewing the world from
a cause-and-effect perspective. This is a good time to emphasise that there are known
reasons for why many things work the way they do in the real world. Although we
cannot predict the behaviour of any one individual, centuries of observation and
analysis have uncovered several general rules explaining the decisions and
behaviours of large numbers of individuals.
Copyright 2023 Cengage Learning Australia Pty Limited
2
, Principles of Microeconomics – 9th edition
How people make decisions
Principle 1: People face trade-offs
• ‘There is no such thing as a free lunch.’ Making decisions requires trading off one goal for another.
Examples include how a student spends their time, how a family decides to spend its income, how
the Australian government spends tax dollars and how regulations may protect the environment at a
cost to firm owners.
• A special example of a trade-off is the trade-off between efficiency and equity.
– Definition: efficiency – the property of society getting the most it can from its scarce resources.
Example: Wasting no resources when making a pie, so the pie becomes as large as possible.
– Definition: equity – the property of distributing economic prosperity fairly among the members
of society.
Example: How should the pie be distributed; that is, who will get a larger slice of the pie and
who will get a smaller slice, or will slices be distributed equally?
– While it is useful to strictly distinguish between efficiency and equity for analytical purposes,
these two concepts are also linked. For example, tax dollars paid by wealthy Australians and
then distributed to those less fortunate may improve equity but also may lower the incentive to
work hard and therefore reduce the level of output produced by our resources.
– This implies that the cost of increased equity is a reduction in the efficient use of resources.
Principle 2: The cost of something is what you give up to get it
• Making decisions requires individuals to consider the benefits and costs of alternative actions.
• Example: What are the costs of going to university?
– We cannot count the complete cost of room and board because the student would have to pay
for food and shelter even if they were not in school. These are part of the cost of living and not
part of the cost of studying.
– We would want to count the value of the student’s time since she could be working for pay
instead of attending classes and studying. Also on a very nice sunny day some students might
value the cost of attending classes much higher than on a rainy day.
• Definition: 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. So
you will need to provide students with numerous examples of ‘free’ things with hidden
costs, especially considering the value of time. The relevant opportunity cost is the
next best alternative, which might differ for each individual.
Principle 3: Rational people think at the margin
• Economists assume people are rational.
• Definition: rational people – people who systematically and purposefully do the beast they can to
achieve their objectives.
• Many decisions in life are incremental in nature: Should I remain in school this semester? Should I
take another course this semester?
• Definition: marginal change – a small incremental adjustment to a plan of action.
• Rational people often make decisions by comparing marginal benefits and marginal cost.
• Example: Decision of whether to watch another movie tonight. If you pay $16 a month for a streaming
service (and you typically watch eight movies a month), the marginal cost is zero – because you pay the
same $16 for the service regardless of how many movies you watch. The marginal cost instead would be
time it takes away from doing another activity; that is, working or reading a textbook.
• Example: Suppose that flying a 200-seat plane from Brisbane to Perth costs the airline $100 000, which
means that the average cost of each seat is $500. Suppose that the plane is minutes from departure,
there are several vacant seats and a passenger is willing to pay $300 for a seat. Should the airline sell
the seat for $300? As long as the marginal revenue exceeds the marginal cost, selling the ticket is
profitable.
Copyright 2023 Cengage Learning Australia Pty Limited
3
