PRINCIPLES OF ECONOMICS

Lecture 1
S. OTGONBAYAR
2022
PRINCIPLES OF ECONOMICS

This introductory course primarily covers microeconomics and macroeconomics.

The goal is to develop your critical thinking and analytical abilities as well as to
understand economic principles and how they relate to the world we live in.

By studying:
Microeconomics (the behavor of consumers and companies) and
Macroeconomics (large-scale economic factors, such as national production,
employment, inflation and interest rates),
you'll learn to think like an economist and understand how a modern market
economy functions.
 Textbook

Principles of Economics.
(8th edition)
N. Gregory Mankiw .
 Evaluation

- 30% Class attendance and participation

- Speak up and share your experience and thoughts, home assignments, seminar

- 20% Short essay

An essay about your personal experience to make an economic decision:

- 50% Final exam

- Written exam (discussion and problem solving and etc.)
 PART I
Introduction

1 Ten Principles of Economics

2 Thinking Like an Economist
3 Interdependence and
the Gains from Trade
 TEN
PRINCIPLES OF ECONOMICS
• What kinds of questions does
economics address?

• What are the principles of how

people make decisions?

• What are the principles of how

people interact?

• What are the principles of how the

economy as a whole works?
What is Economics
Economics is the study of how humans make decisions in the face of scarcity. These can be individual
decisions, family decisions, business decisions or societal decisions:
- How people decide what to buy
- How much to work to save and spend
- How firms decided what and how much to produce

- How the country and government decides to collect and allocate budget
- How to decrease the inflation and alleviate poverty
- How to implement housing plan
- ………

Scarcity is a fact of life.

……….
………
Foundations of Economics: The Law of Scarcity

The Law of Scarcity is based on the the idea that

• an economic system cannot possibly produce all of the goods/services that
consumers want.
• furthermore, most consumers do not have the financial resources to buy all
of the goods/services that they want.

Scarcity means that human wants for goods, services and resources exceed what is
available. Resources, such as labor, tools, land, and raw materials are necessary to
produce the goods and services we want but they exist in limited supply.

The ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the
day to try to acquire the goods they want. At any point in time, there is only a finite
amount of resources available.
scarcity……time…
The principles of

HOW PEOPLE
MAKE
DECISIONS
Principle 1. People face trade-offs
Principle 1. People face trade-offs
Principle 2. The Cost of Something Is What
You Give Up to Get It
Principle 2. The Cost of Something Is What
You Give Up to Get It
Principle 4: People Respond to Incentives
The principles of

HOW PEOPLE
INTERACT
Principle 5: Trade Can Make Everyone
Better Off
Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity
Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity
Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity
Principle 7: Governments Can Sometimes
Improve Market Outcomes
Principle 7: Governments Can Sometimes
Improve Market Outcomes
Principle 7: Governments Can Sometimes
Improve Market Outcomes
The principles of

HOW
THE CONOMY
AS A WHOLE
WORKS
Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services
Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services
Principle 9: Prices Rise When the Government
Prints Too Much Money
Principle 10: Society Faces a Short-Run Trade-off
between Inflation and Unemployment
CHAPTER SUMMARY
Economics is
The study of how humans make decisions in the face of scarcity. These can be individual decisions,
family decisions, business decisions or societal decisions:
- How people decide what to buy
- How much to work to save and spend
- How firms decided what and how much to produce

- How the country and government decides to collect and allocate budget
- How to decrease the inflation and alleviate poverty
- How to implement housing plan
- ………

Scarcity is a fact of life.

……….
Ten principles of economics
The principles of decision making are
1: People Face Trade-offs
2: The Cost of Something Is What You Give Up to Get It
3: Rational People Think at the Margin
4: People Respond to Incentives How People Interact

The fundamental lessons about individual decision making are that people
face trade-offs among alternative goals, that the cost of any action is
measured in terms of forgone opportunities, that rational people make
decisions by comparing marginal costs and marginal benefits, and that people
change their behavior in response to the incentives they face.
Ten principles of economics
The principles of interaction among people are
5: Trade Can Make Everyone Better Off
6: Markets Are Usually a Good Way of coordinating trade
7: Governments can potentially improve market outcomes
if there is a market failure or if the market outcome is inadequate

The fundamental lessons about interactions among people are that trade and
interdependence can be mutually beneficial, that markets are usually a good
way of coordinating economic activity among people, and that the
government can potentially improve market outcomes by remedying a market
failure or by promoting greater economic equality
Ten principles of economics
The principles of the economy as a whole
8: Productivity is ultimate source of living standards
9: Money growth is the ultimate source of inflation
10: Society faces a short-run Trade-off between Inflation and
Unemployment

The fundamental lessons about the economy as a whole are that productivity
is the ultimate source of living standards, that growth in the quantity of
money is the ultimate source of inflation, and that society faces a short-run
trade-off between inflation and unemployment.
Questions for seminar
1. Present three examples of important trade-offs that you face in your life.
2. What items would you include to figure out the opportunity cost of a living in
Ulaanbaatar?
3. Fresh air is necessary for life. Is the marginal benefit of one day hiking to a
mountain large or small?
4. Why should policymakers think about incentives?
Why the GoM paid the utility costs during the pandemic?
5. Why isn’t trade among countries like a game with some winners and some losers?
Who is winner from 30 day visa free travel between China and Mongolia?
Questions for seminar
6. What does the “invisible hand” of the marketplace do?
Why taxi rate increase by 20 percent when petrol price increase by 10 percent in
Ulaanbaatar?
7. What are the of market failure? Give an example.

8. What is productivity, how it is measured

9. What is inflation and what causes it?

2021 inflation rate of Mongolia is 13 percent, but the car price housing price
increased 50 percent, why?
Thank you