The ten principles of economics is explained in a very simple way.

1. TEN PRINCIPLES OF
ECONOMICS
NAME:PAVAN K.N
CLASS: MBA SECTION B
SUBJECT: MICRO ECONOMICS
SUBJECT CODE: MGT226

2. PRINCIPLE 1: PEOPLE FACE TRADE OFFS
Trade off is a situation that involves losing one quality or aspect
of something in return for gaining another quality or aspect.
SOCIETY FACES TRADE OFF BETWEEN EFFICIENCY & 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 society.
LIFE EXAMPLE
• A student faces a trade off between studying for exam or to
watch a much-awaited movie.

3. PRINCIPLE 2: THE COST OF SOMETHING IS WHAT YOU
GIVE UP TO GET IT
• Making decisions requires comparing the costs and
benefits of alternative courses of action.
• Nothing comes for free in this world. You need to give
up something in order to gain something.
• The opportunity cost of an item is what you give up to
get that item
LIFE EXAMPLE
Professional footballer Lionel Messi decided to quit
education to play professional football for the club FC
Barcelona.

4. PRINCIPLE 3: RATIONAL PEOPLE THINK AT THE MARGIN
RATIONAL PEOPLE
• Systematically and purposefully do the best they can to
achieve their objectives.
• Make decisions by evaluating costs and benefits of marginal
changes, incremental adjustments to an existing plan.
LIFE EXAMPLE
If you buy a used car, and plan to spend $10,000, but the car
is only priced at $6,000, would you still buy it if it needed $5,000
in repairs? of course not because
1) you are a rational thinker and
2) you would end up spending more than you planned to.

5. PRINCIPLE 4: PEOPLE RESPOND TO INCENTIVES
• Incentives: Something that induces a person to act, It may be
punishment or reward.
• People responds to incentive because people make decision
by comparing costs and benefits.
• Incentive plays a central roles in study of economics.
Incentives are crucial to analyzing how market work.
• The decision to choose one alternative over another occurs
when that alternative’s marginal benefits exceed its marginal
costs!
LIFE EXAMPLE
When gas prices rise ,customers buy more hybrid cars and fewer
gas guzzling SUVs.

6. PRINCIPLE 5: TRADE CAN MAKE EVERYONE BETTER OFF
• People gain from their ability to trade with one another.
•Rather than being self-sufficient, people can specialize in
producing one good or service and exchange it for other
goods.
• Trade allows each person to specialize in the activities he or
she does best. By trading with others, people can buy a greater
variety of goods or services.
• Countries also benefit from trade and specialization:
➢ Get a better price abroad for goods they produce.
➢ Buy other goods more cheaply from abroad than could
be produced at home country.

7. PRINCIPLE 6: Markets Are Usually a Good Way to
Organize Economic Activity.
Market economy: An economy that allocates resources through the
decentralized decisions of many firms and households as they
interact in markets for goods and services.
➢ Firms decide whom to hire and what to make.
➢ Households decide which firms to work for and what to buy with
their incomes.
Adam Smith made the observation that households and firms
interacting in markets act as if guided by an “invisible hand.”
➢ Because households and firms look at prices when deciding what
to buy and sell, they unknowingly consider the social costs of their
actions.
➢ As a result, prices guide decision makers to reach outcomes that
tend to maximize the welfare of society.

8. PRINCIPLE 7: Governments Can Sometimes Improve
Market Outcomes
• Market failure occurs when the market fails to allocate
resources efficiently.
• When the market fails government can intervene to promote
efficiency and equity.
• Market failure may be caused by,
• An externality, which is the impact of one person or firm’s
actions on the well-being of a bystander.
• Market power, which is the ability of a single person or firm to
unduly influence market prices.
LIFE EXAMPLE
A dry-cleaning factory can cause water pollution when they
dispose off used chemicals. Government has a task of regulating,
auditing and monitoring the activities of the market. Thus, they
can introduce regulating policies to protect the environment.

9. PRINCIPLE 8: THE STANDARD OF LIVING DEPENDS ON
A COUNTRY’S PRODUCTION.
• Countries whose workers produce a large quantity of goods and
services per unit of time enjoy a high standard of living. Similarly, as a
nation's productivity grows, so does its average income.
• Standard of living may be measured
➢ By comparing personal incomes.
➢ By comparing the total market value of a nation’s production.
• Huge variation in living standards across countries and over time:
➢ Average income in rich countries is more than ten times average
income in poor countries.
➢ The U.S. standard of living today is about eight times larger than 100
years ago.

10. PRINCIPLE 9: PRICES RISE WHEN THE GOVERNMENT
PRINTS TOO MUCH MONEY
• When a government creates large quantities of the nation's
money, the value of the money falls. As a result, prices increase,
requiring more of the same money to buy goods and services.
• Inflation is an increase in the overall level of prices in the
economy. One cause of inflation is the growth in the quantity of
money.
• When the government creates large quantities of money, the
value of the money falls.
LIFE EXAMPLE
When there is a lot of money in circulation in the economy, then
the income of the consumer rises, and this will push up the
demand for goods and services. If purchasing power increases it
leads to excess demand the producer will not the able to fulfill
the demand, and since excess doesn't exist in the market, the
producer will increase the price. This will lead to inflation.

11. PRINCIPLE 10: SOCIETY FACES A SHORT-RUN TRADEOFF
BETWEEN INFLATION AND UNEMPLOYMENT
In the short-run (1–2 years), many economic policies push
inflation and unemployment in opposite directions.
Other factors can make this tradeoff more or less
favorable, but the tradeoff is always present.
Phillips curve : shows short-run trade-off b/w inflation &
unemployment.
• Lower unemployment-Higher inflation.
• Inverse relation b/w unemployment & inflation.
• Monetary Policy - instruments of company.

12. THANK YOU