Unit 1: The Ten Principles of Economics
Ten one-line ideas that quietly run every argument in the rest of the course, from budget lines to a nation's growth rate.
8 topics · 30 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Trade-offs and the Cost of a Free Lunch
- How it worksHow does spending more tax money on national defense force less spending somewhere else?
- Worked exampleWalk me through the trade-off a student faces choosing between 3 more hours of studying and 3 more hours of sleep.
- Common mistakeWhy isn't there's no such thing as a free lunch just a saying about money?
- Ties togetherHow does this basic trade-off principle reappear later as the shape of the production possibilities frontier?
Your turn1 of 2
A student chooses to study 3 hours tonight instead of sleeping, and each hour of lost sleep is worth 20 dollars to her in feeling rested tomorrow. What is the total value of sleep she gives up by studying those hours?Opportunity Cost
- How it worksHow do you find the true cost of a decision by looking at the best option you gave up?
- Worked exampleFind the opportunity cost of a student spending a semester at Harvard instead of working a 60000 dollar job.
- Common mistakeWhy isn't the opportunity cost of college just the tuition bill?
- Going furtherWhat happens to the opportunity cost of your time as your best outside wage offer rises?
Your turn1 of 2
Find the opportunity cost of a student spending 3 years at college instead of working a 47980 dollar a year job.Thinking at the Margin
- How it worksHow does comparing the marginal benefit of one more unit to its marginal cost tell you when to stop?
- Worked exampleFind whether a bakery should bake one more loaf of bread if it sells for 4 dollars and costs 3 dollars in extra flour and labor.
- Common mistakeWhy doesn't the huge total value of water make each extra glass of it valuable?
- Going furtherWhat happens to the marginal decision to bake more bread if the price of flour suddenly drops?
Your turn1 of 2
Find whether a bakery should bake one more loaf of bread if it sells for 5 dollars and costs 4 dollars in extra flour and labor. What is the marginal benefit of baking that loaf, net of its marginal cost?How People Respond to Incentives
- How it worksHow does a price change alter both the benefit and the cost side of a decision at the same time?
- Worked exampleFind how much cigarette purchases might fall if a 1 dollar per pack tax raises the price from 6 dollars to 7 dollars and the price elasticity of demand is 0.4.
- Common mistakeWhy can a safety law meant to protect people end up making them take more risks?
- Going furtherWhat happens to smoking rates when a state raises the cigarette tax by 1 dollar a pack?
- Ties togetherHow does the incentive principle explain why a tax on a good works the way it does in a supply and demand graph?
Your turn1 of 2
Find how much cigarette purchases might fall, in percent, if a 2 dollar per pack tax raises the price from 6 dollars to 8.9 dollars and the price elasticity of demand is 0.384.Why Trade Can Make Everyone Better Off
- How it worksHow does specializing in what you produce best let a household or a country consume more overall?
- Common mistakeWhy doesn't a country lose out just because it buys more from a trading partner than it sells?
- Going furtherWhat happens to a family's living standard if it tried to make everything it consumes at home instead of trading?
Your turn1 of 2
One farmer's opportunity cost of one bushel of wheat is 2 bolts of cloth, and a second farmer's is 4 bolts of cloth. If they trade at a rate between the two, both gain. What is the midpoint trading rate they might agree to, in bolts of cloth per bushel?Markets and the Invisible Hand
- How it worksHow do prices coordinate millions of separate buyers and sellers who never talk to each other?
- Worked exampleWalk me through what happens to the price of umbrellas across a city on a morning it starts raining.
- Common mistakeWhy isn't a market economy just chaos with no one in charge?
- Going furtherWhat happens to the invisible hand's coordination when the government sets a price by law?
Your turn1 of 2
Nobody plans how many loaves of bread show up in a city's grocery stores each morning, yet shelves are reliably stocked without any central coordinator. A skeptic calls this pure chaos with no one actually in charge. Is a market economy actually chaotic and uncoordinated?Why Governments Sometimes Improve on Markets
- How it worksHow does a market fail to account for costs a transaction imposes on people outside the deal?
- Common mistakeWhy doesn't market failure mean the whole market economy has failed?
- Ties togetherHow does market power in a monopoly count as a market failure the same way pollution does?
Your turn1 of 2
A single factory's pollution is identified as a market failure in an otherwise well-functioning economy. A commentator concludes this single example proves the entire market economy has failed and should be abandoned. Is this the correct scope of what 'market failure' means?Productivity, Money Growth, and the Bigger Picture
- How it worksHow does a country's output per worker end up setting the ceiling on its average standard of living?
- Common mistakeWhy doesn't printing more money make a country richer?
- Going furtherWhat happens to prices across an economy when its government prints money much faster than the economy grows?
Your turn1 of 2
If a country's money supply grows 12 percent a year and its real output grows 3 percent, what inflation rate does the quantity theory of money predict?