Ten Principles Of Economics.

Ten principles of Economics.
The word economy comes from the Greek word oikonomos, which means “one who manages a household.” The management of society’s resources is important because resources are scarce which means that society’s resources are nature limited and this is what Economies study of how people manage the use of scarce resources. Economists study how people make decisions, howpeople interact with one another and also they analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.
The behavior of an economy reflects the behavior of the individuals who make up the economy, so this book begins the study of economics with four principles ofindividual decision making.
Principle 1: People Face Trade-offs
Making decisions requires trading off one goal against another
Another trade-off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society’s Members. Recognizing that peopleface trade-offs does not by itself tell us what decisions they will or should make.
Principle 2: The Cost of Something Is What You Give Up to Get It
Making decisions requires comparing the costs and benefits of alternative courses of action.
The opportunity cost of an item is what you give up to get that item. When making any decision, decision makers should be aware of the opportunity coststhat accompany each possible action
Principle 3: Rational People Think at the Margin
Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action. Rational people often make decisions by comparing marginalbenefits and marginal costs.
A person’s willingness to pay for a good is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit, in turn, depends on how many units a person already has. A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.
Principle 4: People Respond to Incentives
Anincentive is something that induces a person to act, such as the prospect of a punishment or a reward. Because rational people make decisions by comparing costs and benefits, they respond to incentives
A higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more. As we will see, the influence of prices on the behavior of consumers and producersis crucial for how a market economy allocates scarce resources
Principle 5: Trade Can Make Everyone Better Off
Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. By trading with others, people can buy a greater variety of goods and services at lower cost.
Principle 6: Markets Are Usually a Good Way to Organize Economic ActivityIn a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes.
In any market, buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply.
Centralplanners failed because they tried to run the economy with one hand tied behind their backs—the invisible hand of the marketplace.
Principle 7: Governments Can Sometimes Improve Market Outcomes
Market economies need institutions to enforce property rights so individuals can own and control scarce resources.
There are two broad reasons for a government to intervene in the economy and change...