Assignment 1: There are ten principles of economics according to Mankiw, Briefly list

the ten principles and explain using Zimbabwean examples. Illustrate the principles.

This is a brief list and explanation on the ten principles of economics according to Mankiw
(1954).These principles influence the behaviour of institutions and individuals on how
societies try to satisfy their needs and wants from the scarce resources.

People Face Tradeoffs: To get one thing, we usually have to give up something else. The
current Minister of Finance has argued that to put the economy on a recovery path, there will
be some painful austerity. A student at the ZEGU institution going to a party the night before
midterm exams leaves less time for studying. Having more money to buy stuff requires
working longer hours, which leaves less time for leisure.

The cost of something is what you give up to get it: The essence of the principle is that
making decisions requires comparing the cost and benefits of alternative choices. People will
only take action of the marginal benefit exceed the marginal cost. The opportunity cost of any
item is whatever must be given up to obtaining it. For example, there are many Zimbabweans
who are middle aged who have gone back to University. By going back to University, some
have foregone wages.

Rational people think at the margin: Rational people systematically and purposefully do the
best they can to achieve their objectives. Most Zimbabweans make decisions by evaluating
cost and benefits of marginal changes, incremental adjustments to an existing plan. An
example is the fact that most Zimbabweans are not depositing foreign currency in banks.

People respond to incentives: Incentives can cause people to act positively or negatively. An
incentive is something that induces a person to act. For example, the government of
Zimbabwe introduced export incentive to encourage companies to export more and it also
made local companies to be innovative so as to match world standards.

Trade can make everyone better off: Trade allows countries to specialize according to their
comparative advantages and to enjoy a greater variety of goods and services. Goods and
services sold in Zimbabwe are imported from South Africa while also Zimbabwe exports
gold, platinum and other minerals to other countries as well as tobacco. Rather than being
self-sufficient, people can specialize in producing one good or service and exchange it for
other goods. Countries also benefit from trade and specialization: Get a better price abroad
for goods they produce.

Markets are usually a good way to organize economic activity: Market forces of demand and
supply is the key to organize economic activity. Unfortunately, the Zimbabwean government
continues to meddle with markets through subsidies, price controls and exchange controls etc.
Adam Smith (1776) made the observation that when households and firms interact in markets
guided by the invisible hand, they will produce the most surpluses for the economy. A market
economy allocates resources through the decentralized decisions of many households and
firms as they interact in markets. The invisible hand works through the price system.

Governments can sometimes improve market outcomes: The government can sometimes
improve market outcomes through practices such as property rights. Unfortunately, the
involvement of Government in markets through price controls, land invasions, indigenisation
policies worsens the economic situation. People are less inclined to work, produce, invest, or
purchase if there is large risk of their property being stolen.

A country’s standard of living depends on its ability to produce: The more goods and services
produced in a country, the higher the standard of living. Average income in rich countries is
more than ten times average income in poor countries such as Zimbabwe. The most important
determinant of living standards: productivity, the amount of goods and services produced per
unit of labour. Production depends on the equipment, skill and technology available to
workers.

Prices rise when the government prints too much money: As was the case in Zimbabwe
between 2002 and 2008, when too much money is floating in the economy, there will be
higher demand for goods and services. During this time Central Bank Governor kept on
printing money. This literally sent the economy on free-fall. Inflation is almost always caused
by excessive growth in the quantity of money, which causes the value of money to fall. This
is what happened to the Zimbabwean Dollar.

Society faces a short-run trade-off between inflation and unemployment: The high
inflationary environment in Zimbabwe resulted in many companies retrenching employees.
This principle states that in the short-run (1-2 years), many economic policies push inflation
and unemployment in opposite directions. In the short-run, when prices increase, suppliers
will want to increase their production of goods and services. To achieve this, they need to
hire more workers to produce those goods and services. More hiring means lower
unemployment while there is still inflation. However, this is not the case in the long-run.

Although universally accepted, the application of these principles tends to vary from country
to country, depending on the governance and policy regimes in place. These principles
highlighted above are basic tenets of economics which when followed and applied correctly,
will result in economics functioning as per normal.
Bibliography

Smith A. (1776), Wealthy of Nations, London, Sage Publishers

Mankiw N.G. (1954), Principles of Economics, New York, Macmillan