Ten Principles of Economics

Chapter Objectives

  • Explain how scarcity influences decisions.

  • Explain how individuals evaluate opportunity costs to make decisions.

  • Explain how marginal analysis influences decision making.

  • Apply basic, economic principles of individual decision making that determine how an economy generally works.

  • Explain how the terms of trade can lead to gains.

  • Given a scenario, identify the distribution system being used.

Ten Principles of Economics

  • Scarcity: Limited resources require societies to make choices.

  • Economics: Study of how society manages scarce resources.

Principle 1: People Face Trade-Offs

  • Decisions involve giving up one thing for another.

  • Efficiency: Maximizing resource use.

  • Equality: Even distribution of prosperity.

  • Trade-off: Greater equality may reduce incentives to work and produce.

Principle 2: The Cost of Something Is What You Give Up to Get It

  • Opportunity Cost: What is given up to obtain something.

Principle 3: Rational People Think at the Margin

  • Rational People: Achieve goals by evaluating marginal changes.

  • Marginal Change: Incremental adjustment to a plan.

  • Decisions occur when Marginal Benefits > Marginal Costs

Active Learning Example: Thinking at the Margin

  • Evaluate marginal benefit (enjoyment) vs. marginal cost (opportunity cost of time).

Principle 4: People Respond to Incentives

  • Incentive: Inducement to act.

  • Rational people make decisions by comparing costs and benefits.

Active Learning Example: Applying the Principles

  • Decisions should be based on the benefit of fixing something compared to the cost.

Principle 5: Trade Can Make Everyone Better Off

  • Trade allows specialization and greater variety of goods/services at a lower cost.

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

  • Market Economy: Decisions are guided by firms and households interacting in the marketplace.

  • Prices guide decisions, reflecting costs and value.

  • Government intervention can impede the invisible hand.

Principle 7: Governments Can Sometimes Improve Market Outcomes

  • Governments enforce rules, property rights, promote efficiency and equality.

  • Market Failure: Markets don’t efficiently allocate resources.

  • Externality: Impact of one’s actions on a bystander.

  • Market Power: Ability to influence prices.

Active Learning Example: The Government

  • Government roles include public schools, safety regulations, highways, and patent laws.

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

  • Productivity determines living standards.

  • Productivity: Quantity of goods/services from each unit of labor.

Principle 9: Prices Rise When the Government Prints Too Much Money

  • Inflation: Increase in overall prices.

  • Caused by excessive money growth.

Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment

  • Increasing money growth stimulates spending, raises prices, increases hiring, and lowers unemployment.

  • Business Cycle: Fluctuations in economic activity.