Ten Principles of
Economics
TEN PRINCIPLES OF
ECONOMICS
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?
TEN PRINCIPLES OF
ECONOMICS
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.
TEN PRINCIPLES OF
ECONOMICS
How people make decisions.
How people interact with each other.
The forces and trends that affect how the economy as a whole
works.
TEN PRINCIPLES OF
ECONOMICS
How people make decisions.
People face tradeoffs.
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.
TEN PRINCIPLES OF
ECONOMICS
How people interact with each other.
Trade can make everyone better off.
Markets are usually a good way to organize economic activity.
Governments can sometimes improve economic outcomes.
TEN PRINCIPLES OF
ECONOMICS
The forces and trends that affect how the economy as a whole
works.
The standard of living depends on a country’s production.
Prices rise when the government prints too much money.
Society faces a short-run tradeoff between inflation and
unemployment.
Principle #1: People Face Tradeoffs.
“There is no such thing as a free lunch!”
Principle #1: People Face Tradeoffs.
V/S
V/S
V/S
Making decisions requires trading off one goal against another.
Principle #1: People Face Tradeoffs
Efficiency v. Equity
Efficiency means society gets the most that it can from its scarce
resources.
Technical Efficiency is production done at lowest unit cost?
Allocative Efficiency are resources being used to make products
that people want
Equity means the benefits of those resources are distributed fairly
among the members of society.
Horizontal Equity no discrimination between people whose economic
characteristics and performance are equal
Vertical Equity different treatment of different people in order to reduce
the differences between people
Principle #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.
Principle #2: The Cost of Something Is What You
Give Up to Get It.
Decisions require comparing costs and benefits of
alternatives.
Whether to go to college or to movie?
Whether to play game or study?
The opportunity cost of an item is what you give up
to obtain that item.
Principle #2: The Cost of Something Is What You
Give Up to Get It.
Alia Bhatt has completed her school education from Jamnabai
Narsee School. Just after completing her school education, she
entered Bollywood.
Principle #3: Rational People Think at the Margin.
Marginal changes are small, incremental
adjustments to an existing plan of action.
People make decisions by comparing
costs and benefits at the margin.
Principle #3: Rational People Think at the Margin.
Flipkart
Amazon
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!
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 goods and services.
Households decide what to buy and who to work for.
Firms decide who to hire and what to produce.
Principle #6: Markets Are Usually a Good Way to
Organize Economic Activity.
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
take into account the social costs of their actions.
As a result, prices guide decision makers to reach
outcomes that tend to maximize the welfare of
society as a whole.
Principle #7: Governments Can Sometimes Improve
Market Outcomes.
Market failure occurs when the market fails to
allocate resources efficiently.
When the market fails (breaks down) government
can intervene to promote efficiency and equity.
Principle #7: Governments Can Sometimes Improve
Market Outcomes.
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.
Principle #8: The
Standard of Living
Depends on a
Country’s
Production.
Standard of living may
be measured in different
ways:
By comparing personal
incomes.
By comparing the total
market value of a
nation’s production.
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Principle #8: The
Standard of Living
Depends on a
Country’s
Production.
Almost all variations in
living standards are
explained by differences
in countries’
productivities.
Productivity is the
amount of goods and
services produced from
each hour of a worker’s
time.
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Principle #8: The
Standard of Living
Depends on a
Country’s
Production.
Standard of living may
be measured in different
ways:
By comparing personal
incomes.
By comparing the total
market value of a
nation’s production.
https://mobilityexchange.mercer.com/Insights/cost-of-living-rankings
Principle #9: Prices Rise When the Government
Prints Too Much Money.
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.
Principle #10: Society Faces a Short-run Tradeoff
Between Inflation and Unemployment.
The Phillips Curve illustrates the tradeoff between inflation and
unemployment:
Inflation Unemployment
It’s a short-run tradeoff!
Summary
When individuals make decisions, they face tradeoffs among
alternative goals.
The cost of any action is measured in terms of foregone
opportunities.
Rational people make decisions by comparing marginal costs
and marginal benefits.
People change their behavior in response to the incentives they
face.
Summary
Trade can be mutually beneficial.
Markets are usually a good way of coordinating trade among
people.
Government can potentially improve market outcomes if there
is some market failure or if the market outcome is inequitable.
Summary
Productivity is the ultimate source of living standards.
Money growth is the ultimate source of inflation.
Society faces a short-run tradeoff between inflation and
unemployment.
