Ten Principles of Economics
How People Make Decisions:
1. People face tradeoff:
To get one thing we usually have to give up another thing.
For Example Gun Vs Butter, Food v Clothing, Efficiency v equity.
· Efficiency: Means society gets the most that it can from its scarce resources.
· Equity: Means the benefits of those resources are distributed fairly among the members of the society.
To get one thing we usually have to give up another thing.
For Example Gun Vs Butter, Food v Clothing, Efficiency v equity.
· Efficiency: Means society gets the most that it can from its scarce resources.
· Equity: Means the benefits of those resources are distributed fairly among the members of the society.
2. The cost of something is what you give up to get it:
The decision requires comparing costs and benefits of alternatives.
For example: Whether to go to college or to work, Study or go out on a date, Sleep or go to class.
· Opportunity Cost: The opportunity cost of an item is what you give up to obtain that item.
The decision requires comparing costs and benefits of alternatives.
For example: Whether to go to college or to work, Study or go out on a date, Sleep or go to class.
· Opportunity Cost: The opportunity cost of an item is what you give up to obtain that item.
3. Rational people thinks at the margin:
People make decisions by comparing costs and benefits at the margin.
· Marginal Changes are small, incremental adjustments to an existing plan of action.
4. People respond to incentives:
The incentive is something that causes a person to act. Because people use cost and benefit analysis, they also respond to incentives Ex. Higher taxes on cigarettes to prevent smoking
5. 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
6. Markets are usually a good way to organize economic activities.
Adam Smith 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
7. Governments can sometimes improve economic outcomes.
When the market fails government can intervene to promote efficiency and equity.
8. The standard of living depends on country’s production:
The more goods and services produced in a country, the higher the standard of living. As people consume a larger quantity of goods and services, their standard of living will increase.
9. Prices rise when governments print too much money.
When too much money is floating in the economy, there will be the higher demand for goods and services. This will cause firms to increase their price, in the long run, causing inflation.
10. Society faces a short run tradeoff between inflation and unemployment.
In the short run, when prices increase, suppliers will want to increase their production of goods and services. In order 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.
People make decisions by comparing costs and benefits at the margin.
· Marginal Changes are small, incremental adjustments to an existing plan of action.
4. People respond to incentives:
The incentive is something that causes a person to act. Because people use cost and benefit analysis, they also respond to incentives Ex. Higher taxes on cigarettes to prevent smoking
How People Interact:
5. 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
6. Markets are usually a good way to organize economic activities.
Adam Smith 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
7. Governments can sometimes improve economic outcomes.
When the market fails government can intervene to promote efficiency and equity.
How the Economy as a Whole Works:
8. The standard of living depends on country’s production:
The more goods and services produced in a country, the higher the standard of living. As people consume a larger quantity of goods and services, their standard of living will increase.
9. Prices rise when governments print too much money.
When too much money is floating in the economy, there will be the higher demand for goods and services. This will cause firms to increase their price, in the long run, causing inflation.
10. Society faces a short run tradeoff between inflation and unemployment.
In the short run, when prices increase, suppliers will want to increase their production of goods and services. In order 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.
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