Ten Principles of Economics

 N. Gregory Mankiw, a famous writer, describes ten principles of Economics in his text Principles of Economics. These are:

• 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

• Trade Can Make Everyone Better Off

• Markets Are Usually a Good Way to Organize Economic Activity

• Governments Can Sometimes Improve Market Outcomes

• A Country's Standard of Living Depends on Its Ability to Produce Goods and Services

• Prices Rise When the Government Prints Too Much Money

• Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

People Face Tradeoffs:

We have to give up another thing to get one thing. We can't do two things at the same time. 

Example: Taking a rest or reading a book.

The Cost of Something is What You Give Up to Get It:

Opportunity cost is the second best alternative. There can be a lot of other options. But in opportunity cost, it is considered just the second best.

Example: You have 10 dollars. You need to buy a book first. Secondly, you need a shirt. Thirdly, you wish to eat a burger. Here your buying books opportunity cost is buying a shirt.

Rational People Think at the Margin:

Marginal changes are small, incremental changes to an existing plan of action. When you do anything, focus on your margin. 

Example: Producers' decision to produce one more shirt or not. He will produce as long as he will earn positive revenue.

People Respond to Incentives:

An incentive is something that causes a person to act in that matters. As people use cost and benefit analysis, they respond to incentives.

Example: 20% discount in stock clearing sale.

Trade Can Make Everyone Better Off:

Trade is the only way where everyone can generate profit. Actually market gives more profit to both buyers and sellers.

Example: A seller bought a cycle for 150 dollars and sells for 180 dollars. Buyers bought the cycle because his son's school is far from the house and he had to pay 200 dollars per month. Here seller's profit is 30 dollars and the buyer's profit is a long time asset at a reasonable price. 

Markets Are Usually a Good Way to Organize Economic Activity:

Adam Smith made the observation that when households and firms interact in markets guided by the invisible hand, they will produce the most surpluses for the economy. In this system, the market determines the price.

Example: If you buy or sell something, that place is called market

Governments Can Sometimes Improve Market Outcomes:

Market failures occur when the market fails to allocate resources efficiently. Governments can step in and intervene in order to promote efficiency and equity.

A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services:

The more goods and services produced in a country, the higher the standard of living will be. As people consume a larger quantity of goods and services, their standard of living will increase.

Prices Rise When the Government Prints Too Much Money:

When the government prints too much money, it starts floating in the economy. As people have more money, there will be a higher demand for goods and services as people have. This will cause firms to increase their price, in the long run, causing inflation.

Society Faces a Short-Run Tradeoff Between Inflation and Unemployment:

In the short run, when prices of goods and services increase, suppliers will want to increase their production. To achieve this target, they need to hire more workers to produce those goods and services. More hiring means lower unemployment. As people have jobs, they earn more and spend more. And for this, prices of goods and services increase. However, this is not the case in the long run.