ECON 30023 (Macroeconomics): Module 1

Topic: Introduction and the Ten Principles of Economics

Reference: Macroeconomics by Carlos Manapat and Alvin Ang
Prepared by: Mar Jonathan P. Flores, College Instructor

I. Learning Objectives

1. Define Economics.
2. Identify the main problem of economics.
3. Enumerate the different economic resources/factors of production.
4. Understand the Ten (10) principles of economics.

II. Economics

1. “Oikonomos” – Greek word meaning household management.

2. Proper allocation and efficient use of available resources for the maximum satisfaction
of human wants.

➢ Scarcity – a situation on which limited resources cannot meet the fulfillment of the
unlimited needs and wants.

a. Needs – consist of the products or services that an individual cannot live

without based on his or her existing lifestyle.

b. Wants – refer to products and services that a person can do without the
regardless of his or her lifestyle.

➢ Limited resources

a. Land – covers all-natural resources that exist without man’s intervention. The
resources are irreproducible. The payment for land is called rent.

b. Labor – this refers to human input such as manpower skills which are used in
transforming resources into different products that answer people’s needs.
Payments for labor are called wages and salaries.

c. Capital – it is the man-made factor of production used to create another

product. Examples are machinery and equipment use my manufacturing
companies. The payment for capital is interest.

d. Entrepreneurship – this integrates land, labor, and capital to create new

products.

➢ Unjust Distribution – biggest problem, the maldistribution of wealth and income

is the root of poverty.

III. The Ten Principles of Economics

Eminent macroeconomist N. Gregory Mankiw (2004) gave us ten principles of

economics in his book “Principles of Economics.”
1. People face trade-offs.
i. Each time a person decides, he or she also makes a trade-off. To get one
thing, we usually have to give up something else.

ii. Ex. Leisure time vs. work; An example is a family’s decision on the
allocations of a month’s salary.

2. The cost of something is what one gives up getting it.

i. When a particular need is pursued, all other alternatives are forgone.

o Opportunity cost – it is the value of the second-best choice.

▪ Ex. The opportunity cost of going to college is the money you could
have earned if you used that time to work.

3. Rational People think at the margin.

i. People choose the lesser marginal cost. People will only take action of the
marginal benefit exceed the marginal cost.

ii. Marginal changes are small, incremental changes to an existing plan of

action.

iii. Ex. Deciding to produce one more pencil or not.

4. People respond to incentives.

i. Incentive is something that causes a person to act. Because people use
cost and benefit analysis, they also respond to incentives.

ii. Ex. Higher taxes on cigarettes to prevent smoking.

5. Trade can make everyone better off.

i. Trade-off between participants usually gets a bigger output with less input.

ii. Trade allows countries to specialize according to their comparative

advantages and to enjoy a greater variety of goods and services.

6. Markets are usually a good way to organize economic activity.

i. Adam Smith made the observation that when households and firms
interact in markets guided by the invisible hand, they will produce the
most surpluses for the economy.

7. Governments can sometimes improve market outcomes.

i. Market failures occur when the market fails to allocate resources
efficiently. Governments can step in and intervene in order to promote
efficiency and equity.

8. A country’s standard of living depends on the ability to produce goods and

services.
i. The more goods and services produced in a country, the higher the
standard of living. As people consume a larger quantity of goods and
services, their standard of living will increase.
9. Prices rise when the government prints too much money
i. an increase in the money supply without an increase in the nation’s output
leads to inflation.

ii. When too much money is floating in the economy, there will be higher
demand for goods and services. This will cause firms to increase their price
in the long run causing inflation.

10. Societies face a short-run trade-off between inflation and unemployment.

i. The increase in money supply in the short run fuels the economy to
increase spending, prompting firms to increase output and raise prices.
This, in turn, leads to an increase in employment and decrease
unemployment.

ii. In the short run, when prices increase, suppliers will want to increase their
production of goods and services. To achieve this, they need to hire more
workers to produce those goods and services. More hiring means lower
unemployment while there is still inflation. However, this is not the case in
the long run.
Guide Questions:

1. Define Economics.
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2. What is the difference of needs and wants.

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3. What is the main problem of economics?

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4. Identify and define the four factors of production.

a. __________________________________________________________________________
b. __________________________________________________________________________
c. __________________________________________________________________________
d. __________________________________________________________________________

5. Enumerate the ten principles of economics.

a. __________________________________________________________________________
b. __________________________________________________________________________
c. __________________________________________________________________________
d. __________________________________________________________________________
e. __________________________________________________________________________
f. __________________________________________________________________________
g. __________________________________________________________________________
h. __________________________________________________________________________
i. __________________________________________________________________________
j. __________________________________________________________________________