Ten principles of economics

Lenon Cristhians

Principles of Economics
The word economy comes from a Greek word for “one who manages a household.” A household and an economy face many decisions:     Who will work? What goods and how many of them should be produced? What resources should be used in production? At what price should the goods be sold?

Society and Scarce Resources: The management of society’s resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

Economics is the study of how society manages its scarce resources.
Economists study:    How people make decisions. How people interact with each other. The forces and trends that affect the economy as a whole.

Ten Principles of Economics
How People Make Decisions
1. People face tradeoffs. 2. The cost of something is what you give up to get it. 3. Rational people think at the margin. 4. People respond to incentives.

How People Interact
5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Governments can sometimes improve economic outcomes.

How the Economy as a Whole Works
8. The standard of living depends on a country’s production. 9. Prices rise when the government prints too much money. 10. Society faces a short-run tradeoff between inflation and unemployment.

1. People face tradeoffs.
To get one thing, we usually have to give up another thing. Efficiency v. Equity
Example: A couple deciding how to spend the family income. Buy clothes or go on holiday.

2. The cost of something is what you give up to get it.
Decisions require comparing costs and benefits of alternatives. “The opportunity cost of an item is what you give up to obtain that item.”
Example: Whether to study or go out on a date?

3. Rational people think at the margin.
Marginal changes are small incremental adjustments to an existing plan of action. People