From Paul Krugman's MasterClass

Two Fundamental Principles of Economics

First—people respond to incentives. Second—each transaction has an equal give and take. Paul breaks down economic thinking into two main principles and teaches you the intricacies of each.

Topics include: Applying Principle 1: People Take Advantage of Incentives • Applying Principle 2: Every Sale Is a Purchase • The Parable of the Babysitting Co-op • Good Economics Can Be Beautiful

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First—people respond to incentives. Second—each transaction has an equal give and take. Paul breaks down economic thinking into two main principles and teaches you the intricacies of each.

Topics include: Applying Principle 1: People Take Advantage of Incentives • Applying Principle 2: Every Sale Is a Purchase • The Parable of the Babysitting Co-op • Good Economics Can Be Beautiful

Paul Krugman

Teaches Economics and Society

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What inspires average people to work harder, push for more, and achieve goals? Sometimes, that inspiration comes from within. But other times, incentives can help motivate people to perform to the best of their abilities. In the most general terms, incentives are things that motivate a person to do something. However, when we’re talking about economic incentives, the definition becomes a bit narrower. Economic incentives are financial motivations for people to take certain actions. There are two types of incentives: Extrinsic Intrinsic Extrinsic incentives encompass receiving a reward or avoiding punishment. Economic incentives are extrinsic motivators, in which a reward, like money, will motivate someone to accomplish a goal or task. In contrast, intrinsic motivation is when a person is motivated to do something for its own sake, without an outside pressure or reward. It’s that feeling of personal fulfillment and satisfaction that people get from doing certain things, like learning a new skill just for the fun of it. Common Types of Economic Incentives The most common type of economic incentive system is payroll: A paycheck motivates people to go to work. Here are five more examples of common economic incentives: 1) Tax Incentives Tax incentives—also called “tax benefits”—are reductions in tax that the government makes in order to encourage spending in a certain area. Tax incentives are often cited as a great way to encourage economic development. So, for example, a common individual tax exemption in the United States is the mortgage interest deduction, which makes it so money paid toward mortgage interest isn’t counted as taxable income. This incentivizes people to buy property. An example of a corporate tax incentive is a government giving a major company tax breaks in exchange for them building an office or plant in their city. This type of special tax incentive stimulates the economy in that area by empowering the company to provide jobs as well as make goods or services available for purchase. 2) Financial Incentives A financial incentive is a broader term that encompasses any monetary benefit given to a consumer, employer, corporation, or organization in order to incentivize them to do something they might not otherwise do. For employees, a financial incentive might be stock options or commissions that encourage certain types of work (just think of salespeople whose commission is considered a sales incentive). For customers, an example of a financial incentive is a “discount,” like a buy-one-get-one sale which encourages more spending under the guise of saving. 3) Subsidies Subsidies are governmental incentive programs that provide set amounts of money to businesses in order to help them grow. Agricultural subsidies are common in the United States, with the federal government giving farmers billions of dollars both to farm more of certain products and to reduce their outputs in times of sur...

Think like an economist

For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.

Reviews

4.7
Students give MasterClass an average rating of 4.7 out of 5 stars.

Great and enlightening Masterclass! I really enjoyed it!!

Very informative. I feel as though I have a better understanding of this topic.

I learned that I need to more thoroughly exam claims made by pundits and that I need to avoid quickly espousing theories that seem to align closely with my previously conceived opinions. I felt the course went into too much detail about some lower level issues and went rather quickly over more complicated economic theory. I wish these had been reversed. I enjoyed the course. Thank you.

You can tell Paul has a million things rolling around in his head...but he does a FANTASTIC job of breaking down the basic concepts of economics!!

Comments

Sagnik P.

The links on the last page of the PDF don't seem to be working. These links point to Ricardo's work and Jodi Begg's rendering of circular flow model.

ARMANDO T.

I would like to point out that the "every sale is a purchase" principle does not apply to fractional reserve banking system.

Neha

The lesson is good. But I am unable to download the lesson pdf. Can someone help me with that?

Junaid M.

Putting the pieces of the puzzle together. Clarity is emerging. Thanks, Prof. Krugman.

Robert K.

So here it is - we can see on the babysitting co-op example how the Keynesians (and our esteemed Nobel laureate) get it wrong. This example totally ignores a possibility of a free market for the coupons where their price would self-adjust. Unbelievable. The babysitting co-op was indeed ruined because it was run by a bunch of incompetent academics in Krugeristan centrally manipulating the supply of the coupons. Please spend a few minutes to understand the fundamental errors these dangerous economists unleashed on us: https://mises.org/library/post-modern-economics-return-depression-economics-paul-krugman

Graeme R.

Much as I like the content, I feel that this is more like a university lecture, or even a tutorial, than a master class. I need to think about why, and what I really want, but does anyone else feel the same way. There are plenty of MOOCs.

Kirsten P.

I'm confused about the import/export example with buying shoes from China. China sends us shoes, we send them dollars. Some of the dollars go towards buying US exports like soybeans and the rest goes to buying US government bonds? Are US government bonds the only alternative to buying US exports? Couldn't they use the rest of the money for something else entirely?

Walid Z.

I would appreciate your kind explanation? How every sale is also a purchase in international trade? Assume a local US company Imports Tissue and another US company import food? and no exports for simplicity. Both local companies purchases from outside consumables. where is the sales part of my former example? NB. I am a non-economic specialist, excuse my basic question.

Alima

I get this message when I try to download the lesson pdf? This XML file does not appear to have any style information associated with it. The document tree is shown below. <Error> <Code>AccessDenied</Code> <Message>Request has expired</Message> <X-Amz-Expires>3600</X-Amz-Expires> <Expires>2019-02-21T04:07:09Z</Expires> <ServerTime>2019-02-21T04:34:01Z</ServerTime> <RequestId>604B6C1B0F18FF3D</RequestId> <HostId> K+NfS+DoQdSasrMOZzeFGprVyfHX5AEc6iZK27VskxGJRZPrD2FGukRhwg394q+cae+YlL9KVdM= </HostId> </Error>

A fellow student

I don't understand in the model of baby sitting coop, why don't couple try to offer more coupon for the actual baby sitting time?