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Krugmanessentials4e Irmch01
Krugmanessentials4e Irmch01
First Principles
Chapter Objectives
This chapter will introduce 12 basic principles of economics.
• A set of principles for understanding the economics of how individuals make
choices:
(1) People must make choices because resources are scarce.
(2) The opportunity cost of an item is its true cost.
(3) “How much” decisions require making trade-offs at the margin.
(4) People usually respond to incentives to make themselves better off.
• A set of principles for understanding how economies work through the interaction
of individual choices:
(5) There are gains from trade.
(6) Because people respond to incentives, markets move toward equilibrium.
(7) Resources should be used as efficiently as possible to achieve society’s goals.
(8) Because people usually exploit gains from trade, markets usually lead to
efficiency.
(9) When markets don’t achieve efficiency, government intervention can
improve society’s welfare.
• A set of principles for understanding economy-wide interactions:
(10) One person’s spending is another person’s income.
(11) Overall spending sometimes gets out of line with the economy’s productive
capacity.
(12) Government policies can change spending.
Chapter Outline
Opening Example: This example discusses the idea that all economists use a set of com-
mon principles that apply to many different issues.
Teaching Tips
Individual Choice: The Core of Economics
Creating Student Interest
Ask students if they have made any economic decisions today. Some will pause over the
word economic and wonder if they really have made any economic decisions. Others will
say they came to class, they got up, or they decided what to have for breakfast. This is a
good opportunity to point out that economic decisions do not have to involve business
or money. Decisions must be made because resources are scarce.
Ask students to identify the resources that they think are scarce, both in their lives and
in the world as a whole. Make a list of these items as they call them out and then dis-
cuss the items on the list. The obvious items will be time and money. You might use
this opportunity to point out that it is not necessarily money that is scarce, but rather
income. Other items on the list could include various natural resources, such as fossil
fuels, land, food, and water. You might discuss the idea that water and land are only
scarce in some places or only at some times. Food is not necessarily scarce, but many
people do not have the means or ability to purchase an adequate amount of food.
Regarding the decision to come to class, ask students what the benefits of coming to
class are, particularly on the first day. Now ask them what the costs of coming to class
are. Some of them may think of monetary costs, such as tuition, books, or the parking
permit they had to buy. Others may realize that there were other things they could be
doing with their time. Use this example to discuss the difference between explicit and
implicit cost, and the concept of opportunity cost.
Ask students to write down what they believe to be the meaning of the Adam Smith state-
ment. You might want to collect what they write and use their more correct interpreta-
tions of the meaning to discuss the ideas of specialization and mutual gains from trade.
You can also do this without collecting the writings. Discuss how markets can coordinate
the activities of millions of individuals for their common benefit.
Economy-wide Interactions
Creating Student Interest
Ask students how they think the U.S. economy is doing now in comparison with past
years. Next, ask them to explain why they answered the way they did. For example, if
they gave the economy a C, why did they assign this grade? If you are teaching macro-
economics you may choose to elaborate on this topic, or you may defer discussion until
you reach the macro chapters. If you are teaching microeconomics you may prefer to skip
the economy-wide principles altogether.
GDP, inflation, and unemployment in comparison with the average long-run values. This
will give students a sense of whether the economy is performing above or below average,
or right on target. Use the example of a factory that typically produces 100 boxes of output
a week. Might they decide in a given week to produce more or less than 100 boxes, and
is it even possible to produce more than 100 boxes? This will help students think about
spending and production relative to productive capacity. To introduce government policy,
ask students to identify reasons why we have government. This is sure to lead to a lively
discussion.
Activities
The Opportunity Cost of Attending College (5–10 minutes)
Either working alone, in groups, or as a class, have students calculate the annual
opportunity cost of attending college based on the following expenses realized by the
typical student: tuition $8,000, books and school supplies $1,000, housing $5,000, food
$3,000, entertainment $2,000, and transportation-related expenses $3,000. Now ask
them if there is anything else they should count as part of the opportunity cost. (The
opportunity cost of attending college for one year will include the cost of tuition, books
and school supplies, and forgone income. The other expenses you would incur even if
you were not in school.)
Web Resources
The Bureau of Labor Statistics website has data on prices and unemployment.
www.bls.gov
The Bureau of Economic Analysis website has data on spending, income, and produc-
tion. www.bea.gov
The Federal Reserve Bank of St. Louis website has an abundance of data on everything
from prices to interest rates to spending. From the main page, click on research and
data. www.stlouisfed.org