MGT Notes

Reference, ‘Principles of Economics,’ by N. Gregory Mankiw, 3e, Pg 4

Since the behavior of an economy reflects the behavior of the individuals participating in the economy, we can study the principles of individual decision making :

Tradeoffs:

Individuals face a trade-off in how they spend their income (how is it divided among household expenses, bills, savings, etc). Just like individuals, economies face trade-offs in achieving one goal against another. An example of such a trade-off is between Efficiency (getting the most out of scarce resources, reflecting the size of the economic pie) and Equity (how equally are the benefits distributed among a society’s members, reflecting how the pie is divided). If a more equitable distribution is desired, the output can suffer due to declining motivation.