An Introduction: The Ten Principles (Part One)

I’d like to say that I have a basic understanding of economics but in all honesty, I’m clueless. To get a foothold, I talked to my dad and a close family friend who shared their beginnings in economics during their MBAs. During our discussions, we repeatedly stumbled upon Gregory Mankiw, the former Chairman of the Council of Economic Advisors and a current economics professor at Harvard University (if you would like to find out a little bit more about Mankiw, refer to the link to his blog I hve on the right or I’m sure Wikipedia would oblige). After a little more research, I thought I’d start by looking into Mankiw’s 10 principles of economics appearing in the first chapter of his book, Principles of Economics 3rd ed. Time to delve into the world of scarcity, investment, consumption…

Mankiw’s ten principles can roughly be divided into three categories: how we make decisions (one through four), how the economy works (five through seven) and the way we interact (eight through ten). The first principle states that people face trade-offs or simply put, to get something we want we have to give something else up. I’m sure we’ve all faced this kind of dilemma in our lives. To illustrate, I will share an example that I will refer back to for several of the principles. Last year, for my birthday, I got an 8gb iPod touch. Despite my enthusiasm, I couldn’t help but feel disappointed at how few upgrades were made from the previous generation. After thinking about it for a while, I decided to stick it out till the next generation was released. Now almost a year later, I got the iTouch 4g with a camera, facetime and an upgrade to 32gb. Some would that isn’t worth almost a year of wait but it was a trade-off I was willing to make.

The second principle is that the cost of something is what you give up to get it. This simply encompasses the monetary as well as the implicit moral/personal aspects of pricing. Here we can once again refer to my above example; the cost of the my new iTouch included not only the extra $100 for the memory and generation upgrade but also the year I spent waiting for its arrival. Our next principle stipulates that rational people think at the margin. This means that when we consider an extra unit, we rationally weigh its cost and benefits. I have had the iPod nano (3g) 8gb for about three years now. Thus, deciding to get my new iTouch (an extra unit) required that I rationally judge if the extra storage, applications and other additional benefits excuse the costs incurred. In another, more common example, if you decided to work a few extra hours a week you are employing Mankiw’s third principle to deem if the extra pay is worth the time away from home or leisure. The fourth rule asserts that people respond to incentives. I’m sure this doesn’t require any further clarification but for the sake of tradition, my incentive not to keep my original gift was the promise of a much better, far more worthy iTouch within an acceptable period of time.