Note. From Principles of Economics, Chapter 1, Table 1 by N. Mankiw, 2024, Cengage.
Examples for each of the Ten Principles of Economics
The Ten Principles of Economics explain some of the basic ideas that influence how people, businesses, and governments make economic decisions. These principles help us understand topics such as tradeoffs, opportunity cost, incentives, markets, inflation, and unemployment. The examples below show how each principle can be applied to everyday life and real-world situations.
Example:
Studying more means less free time; a government choosing more healthcare spending may reduce funds for education.
The cost of something is what you give up to get it (opportunity cost).
Example:
The opportunity cost of attending college is tuition plus the wages you forgo by not working full time.
Rational people think at the margin.
Example:
A baker decides whether to bake one more loaf by comparing the extra revenue to the extra cost of ingredients and time.
People respond to incentives.
Example:
Higher cigarette taxes reduce smoking; bonuses motivate employees to increase productivity.
Trade can make everyone better off.
Example:
Two countries specialize (one grows wheat, the other makes computers) and trade to obtain both more cheaply than producing both themselves.
Markets are usually a good way to organize economic activity.
Example:
In competitive markets, prices coordinate buyers’ and sellers’ decisions, allocating resources efficiently (e.g., supply of smartphones meeting consumer demand).
Governments can sometimes improve market outcomes.
Example:
Government provides public goods (national defense) and corrects externalities (pollution taxes) that markets undersupply or misprice.
A country’s standard of living depends on its ability to produce goods and services.
Example:
Countries with higher labor productivity (better education, technology) have higher GDP per capita and living standards.
Prices rise when the government prints too much money (inflation).
Example:
Rapid increases in money supply can lead to high inflation, as seen in hyperinflation episodes (e.g., Zimbabwe).
Society faces a short-run tradeoff between inflation and unemployment.
Example:
Stimulative monetary policy can lower unemployment temporarily but may raise inflation; conversely, fighting inflation can raise short-term unemployment.
Mankiw, N.G. (2024). Principles of Economics. Cengage Learning.
Need More Help?
Want additional support? Sign up for our group sessions. Take a look at the full workshop schedule. For help signing up and accessing the Academic Support Center, see the How to Book ASC Sessions Page.