The ten principles of economics
As a noun, economics is used to refer to the branch of knowledge concerned with the production, consumption, and transfer of wealth. Economics entails the understanding of how a society manages to adapt and utilize its scarce resources. Every day people’s lives are affected by economics, whether it be buying apples from a market or paying your credit card bill. An American economics professor, Gregory Mankiw is responsible for determining the 10 principles of economics and how they determine day-to-day functions.
The first economic principle is that people face trade-offs. This principle correlates with the saying, “there is no such thing as free lunch.” What this means is, people usually have to give up something in order to gain another. Making decisions requires trading off one goal against another. An example of a trade-off could be having only enough money to travel to either Canada or Switzerland, but not both.
The second principle is that the cost of something is what you give up to get it. This is opportunity cost, which is created by trade-offs. When you face the decision of making a trade-off, the option you decided not to pursue would be your opportunity cost. This concept explores not only the out-of-pocket cost but, everything given up when making a decision. An example that outlines opportunity cost could be attending a concert instead of working extra hours. When deciding to pick the concert overwork, you are giving up the opportunity to earn extra wages. This principle factors into a multitude of decisions made by people all over the globe. It helps people understand time management, budgeting their expenses, etc.
The third principle Gregor Mankiw discovered is, rational people, think at the margin. The decisions we make in life are rarely black and white, but usually involve shades of gray. Economists use marginal changes to describe miniature incremental adjustments to an existing plan of action; this defines the changes around the edges of what you are doing. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.
The fourth principle is people respond to incentives. This highlights the way people act to certain economic changes. People make their decisions by comparing costs and benefits, and their behavior may change when the costs or benefits change. For example, if the gas price goes up, people might start driving fewer miles to save more money.
Gregor Mankiw discovered the fifth principle of economics to be, trade can make everyone better off. Trade allows people, businesses, and even nations to specialize in what they do best and to enjoy a greater variety of goods and services. This benefits a wide range of people by allowing them to have access to a ubiquitous range of choices at a lower price.
The sixth principle of economics is that markets are usually a good way to organize economic activity. A market is a designated place where buyers and sellers can meet to facilitate the exchange of transactions of goods and services. In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms will decide whom to hire and what to make, households decide which firms to work for and what to buy with their incomes. Firms and households interact in the marketplace, where prices and self-interest will guide their decision-making.
The seventh economic principle is, the government can sometimes improve market outcomes. There are two broad reasons why a government should intervene in the economy; to promote efficiency and to promote equity. Most government policies aim to either enlarge the economic pie or to change how the pie is divided.
The eighth economic principle is that a country’s standard of living depends on its ability to produce goods and services. A country’s wealth is determined by many factors, one being its ability to produce goods and services. The more wealth a country has determined the quality of life provided to its citizens. For example, citizens who reside in a higher-income country are more likely to own more cars or have faster internet.
The ninth principle of economics is that prices rise when the government prints too much money. This is inflation. The more money printed leads to a decrease in the money’s value.
Finally, the last economic principle is that society faces a short-run trade-off between inflation and unemployment. Reducing inflation is often thought to cause a temporary rise in unemployment. The inverse of this is when inflation drives up employment rates. Firms push up prices because demand is growing faster than supply. In short, this higher growth may lead to lower unemployment as firms take on more workers.