Ten principles of economics
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This chapter introduces the 10 principles of economics. It establishes that economics studies how people make choices under scarcity. Resources are limited but needs and wants are not, so people must make tradeoffs. Rational decision making involves considering costs, like opportunity costs, and responding to incentives. Trade can make all parties better off through markets, though governments sometimes need to improve outcomes. A country's production ability determines living standards, while too much money printing causes inflation, and societies face short-run tradeoffs between inflation and unemployment.
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Ten principles of economics
- 1. Chapter 1 TEN PRINCIPLES OF ECONOMICS
- 2. MAIN IDEA OF ECONOMICS Scarcity Needs + Wants Resources “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” - Lord Lionel Charles Robbins
- 3. MAIN IDEA OF ECONOMICS Scarcity Needs + Wants > Resources
- 4. MAIN IDEA OF ECONOMICS Scarcity Trade-Offs Choices Among Alternatives
- 5. MAIN IDEA OF ECONOMICS Scarcity Trade-Offs Rational Thinking Acting in one’s (perceived) best interest
- 6. MAIN IDEA OF ECONOMICS Scarcity Trade-Offs Rational Thinking Opportunity Cost The value of the best choice NOT taken
- 7. HOW PEOPLE MAKE DECISIONS Principle #1: People Face Tradeoffs Principle #2: The Cost of Something Is What You Give Up to Get It Principle #3: Rational People Think at the Margin Principle #4: People Respond to Incentives
- 8. HOW PEOPLE INTERACT Principle #5: Trade Can Make Everyone Better Off Principle #6: Markets Are Usually A Good Way to Organize Economic Activity Principle #7: Governments Can Sometimes Improve Market Outcomes
- 9. HOW THE ECONOMY WORKS AS A WHOLE Principle #8: A country’s standard of living depends on its ability to produce goods & services. Principle #9: Prices rise when the government prints too much money. Principle #10: Society faces a short-run tradeoff between inflation and unemployment
Editor's Notes
- Ask: Why is there scarcity?
- Q: What does Scarcity result in?A: Trade-Offs, your choices
- In economics we make assumptions. One of the most important assumptions is that people will think rationally. Overall, with a sample as large as an entire populace, on average, the sample with behave rationally. This rational thinking will allow us to make the choice that is best for us.
- Once you make a choice is when you can truly determine the cost of that choice, also known as the Opportunity Cost – the value of the next best choice not taken.Beware of Buyers Remorse – when, after you make your choice, you regret that choice and wish you had made a different decision.
- #1: Because of Scarcity people must make choices. Most often our choices involve how we will spend our time, but it can be measured against any resource as long as it is the underlying “currency” which will be spent on making this decision.#2: There will be a cost of taking one opportunity over another. That cost is based on the value you place on the tradeoffs you choose between.#3: Rational People think at the margin. When we refer to “at the margin” it means we are looking at the cost (vs. the benefit) of one additional item or unit of what we are choosing.#4: Incentives are powerful tools in getting people undertake a specific behavior. They are rewards for do certain things and lessens the cost of your choice by increasing the value of one of your tradeoffs.
- #5: People benefit from trade when they specialize in the production of what they are best at and trade some for the things that they need. In this way, for an entire economic system, more is produced overall and each person involved in the trade can gain more by giving up less – next we are going to look at the benefits of trade by learning about Absolute and Comparative Advantage.#6: While each society coordinates the exchange of goods and services differently, our society generally favors the use of markets to organize the economic activity. This implies that supply and demand are the major contributing factors in determining prices which guide consumers and producers in answering the 3 basic economic questions: What? How? For Whom? Adam Smith dubs this the “Invisible Hand”#7: When the is a market failure, government may be able to improve the outcome and make eliminate the failure. “Failure” is a strong word, but in economics it indicates any situation that does not result in equilibrium or when there are unexpected side effects, good or bad. The side effects are called “Externalities” Positive or Negative. And some times called “Spill-overs” Spillover benefits, and spillover costs.
- #8: As long as a society is able to produce goods and service that improve the lives of the people then they will benefit in their standard of living. As long the amount of goods and services produced grows faster than the population, the country’s standard of living will increase. Note: in this case it is referring to the average standard of living for the people (per capita), we should remember that it does not mean that everyone in the country is actually doing better, but on average it is greater.#9: If value money is based on some finite quantity of goods and services or some commodity, when more money is printed and added to the economy then it will take all of that money in the society to buy the same finite quantity of goods or some commodity as before, result – higher prices.#10: In most situations, economic systems try to find a balance between inflation and unemployment. While unemployment is indicative of an economy that is not growing fast enough, inflation is an indication that the economy is growing too quickly. On occasion, both inflation and unemployment are present, this is a bigger problem called “stagflation” meaning that the economy is not growing (is stagnant) yet there is inflation.