Chapter 1
There are ‘big ideas’ in economics:
1. Incentives matter
● (=) Rewards and penalties that motivate behavior.
● people respond in predictable ways to incentives of all kinds.
● Fame, power, reputation, sex, money etc.
2. Good institutions align self-interest with the social interest.
When self-interest aligns with the broader public interest are at odds, we get good outcomes,
but when self-interest and the social interest are at odds, we get bad outcomes, sometimes
even cruel and inhumane outcomes.
3. Trade-offs are everywhere
● There are always opportunity costs → the cost of a choice is the value of the
opportunities lost.
● The power of trade.
● Wealth and economic growth are important.
Every choice involves something gained and something lost:
Opportunity cost = the value of the opportunities lost by a choice.
4. Thinking on the margin.
Thinking on the margin is just making choices by thinking in terms of marginal benefits and
marginal costs, the benefits and costs of a little bit more (or a little bit less).
5. Trade makes people better off.
The benefit of trade goes beyond those of exchange:
Trade → specialization → increase in productivity.
6. Wealth and economic growth are important
7. Institutions matter. Two types of institutions:
1. Tangible: police ambulance, etc.
2. Intangible: laws.
8. Economic booms and busts cannot be avoided but can be moderated.
9. Inflation is caused by increases in the supply of money.
● The division of wealth created is determined by exchange rates, prices, wages.
● Differences in wages reflect differences in productivity.
● Wages will be higher in high-productivity countries than in low productivity countries.
● Trade raises wages to the highest levels allowed by a country’s productivity.
Globalization: wages will rise in high-labor-demand
10. Central banking is a hard job.
1
There are ‘big ideas’ in economics:
1. Incentives matter
● (=) Rewards and penalties that motivate behavior.
● people respond in predictable ways to incentives of all kinds.
● Fame, power, reputation, sex, money etc.
2. Good institutions align self-interest with the social interest.
When self-interest aligns with the broader public interest are at odds, we get good outcomes,
but when self-interest and the social interest are at odds, we get bad outcomes, sometimes
even cruel and inhumane outcomes.
3. Trade-offs are everywhere
● There are always opportunity costs → the cost of a choice is the value of the
opportunities lost.
● The power of trade.
● Wealth and economic growth are important.
Every choice involves something gained and something lost:
Opportunity cost = the value of the opportunities lost by a choice.
4. Thinking on the margin.
Thinking on the margin is just making choices by thinking in terms of marginal benefits and
marginal costs, the benefits and costs of a little bit more (or a little bit less).
5. Trade makes people better off.
The benefit of trade goes beyond those of exchange:
Trade → specialization → increase in productivity.
6. Wealth and economic growth are important
7. Institutions matter. Two types of institutions:
1. Tangible: police ambulance, etc.
2. Intangible: laws.
8. Economic booms and busts cannot be avoided but can be moderated.
9. Inflation is caused by increases in the supply of money.
● The division of wealth created is determined by exchange rates, prices, wages.
● Differences in wages reflect differences in productivity.
● Wages will be higher in high-productivity countries than in low productivity countries.
● Trade raises wages to the highest levels allowed by a country’s productivity.
Globalization: wages will rise in high-labor-demand
10. Central banking is a hard job.
1
