Ten Principles Of Economics

How people make a decisions

Principles 1 :People Face Trade-offs

• Making decisions requires trading off one goal against another.
• To get one thing,we should give up another thing.
• Efficiency v. equity
• Efficiency:society gets the most that it can from its scarce resources
• Equity : the benefits of those resources are distributed fairly among the members of society.

Principle 2 :The cost of something Is what you give up to get it

• Decisions require comparing costs and benefits of alternatives.
• Opportunity cost : what you give up to obtain that item.

Principle 3: Rational people think at the margin.

• Marginal changes : small, incremental adjustments to an existing plan of action.
• People make decisions by comparing costs and benefits at the margin.\

Principle 4 : People respond to incentives

• Marginal changes in costs or benefits motivate people to respond.
• The decision to choose one alternative over another occurs when that alternative's marginal benefits exceed its marginal costs.

How People Interact

Principle 5 : Trade can make everyone better off

• People gain from their ability to trade with one another.
• Competition results in gains from trading.
• Trade allows people to specialize in what they do best.

Principle 6 :Markets are usually a good way to organize economic activity

• A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for good and services.
• Households decide what to buy and who to work for
• Firms decide who to hire and what to produce.

Principle 7: Governments can sometimes improve market outcomes.

• Market failure occurs when the market fails to allocates resources efficiently.
• This happen may caused by:
• externality: impact of one person or firm actions on the well-being of a bystander.
• market power: ability of a single person or firm to unduly influence market price.

How the Economy as a whole works

Principle 8 : The standard of living depends on a country's production.

• Standards are be measured in :
• by comparing personal incomes.
• by comparing the total market value of a nation's production.

Principle 9 : Prices rise when the government prints too much money.

• Inflation is an increase in the overall level of prices the economy.
• One cause of inflation is the growth the quantity of money.
• When the government creates large quantities of money, the value of money falls.

Principle 10 : Society faces a short-run tradeoff between inflation and unemployment.

• Phillips Curves illustrates the tradeoff between inflation and unemployment
• Inflation decrease ~ unemployment increase.