What are the ten basic principles of economics

One of the Ten Fundamental Principles of Economics: people face alternate relationships

"There is no such thing as a free lunch." In order to get one thing, one usually has to give up another. Making decisions requires us to make trade-offs between one goal and another.

Students face alternations between how to allocate study time, parents face alternations between shopping, traveling and saving, and society faces alternations between efficiency and equality.

-Efficiency: the property of a society to get the most out of its scarce resources.

Equality: the property that economic outcomes are fairly distributed among members of society.

Top Ten Principles of Economics #2: The cost of something is what you give up to get it

In many cases, the cost of an action is not as obvious as it seems at first glance.

The opportunity cost of something is what is given up to get it.

Consider the decision to go to college; the cost is not housing and food, because even if you don't go to college, you still have to rent and eat. The biggest cost is time, and the paycheck you could earn if you spent the time going to college working is the biggest single cost of going to college.

So many professional athletes of college age could be making millions of dollars less per year if they gave up their sport and went to college, so it costs them much more than the average person to go to college. This is why many professional athletes must retire before going to college.

--Opportunity cost: what you have to give up in order to get something.

Top Ten Principles of Economics #3: Rational Man Considers Marginal Quantities

Many decisions involve small incremental adjustments to an existing plan of action, which economists refer to as marginal changes.

Suppose that a 200-seat airplane costs $100,000 to fly once and $500 per seat, and some people would say: fares should never be less than $500. But when there are still 10 empty seats when the plane is about to take off and a passenger waiting at the gate for a refund is willing to pay $300 for a ticket, should he be sold one? Of course you should. If the airplane has empty seats, the cost of adding an extra passenger is minimal. While the average cost of a passenger's flight is $500, the marginal cost is simply the bag of peanuts and a drink that this additional passenger will consume.

A rational decision maker will take an action only if the marginal benefit of that action is greater than the marginal cost.

--Marginal change: small incremental adjustments to an action plan.

Top Ten Principles of Economics #4: People respond to incentives

Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a wide variety of goods and services at lower prices.

Every family in the economy competes with all other families, but isolating your family from all other families does not make it better off, if it did your family would have to grow its own food, make its own clothes, and build its own house.

Countries benefit from trading with each other just as much as families do.

Top Ten Principles of Economics #5: Trade Makes Everyone Better Off

Trade allows everyone to specialize in the activities they do best. By trading with others, people can buy a wide variety of goods and services at lower prices.

Every family in the economy competes with all other families, but isolating your family from all other families does not make it better off, if it did your family would have to grow its own food, make its own clothes, and build its own house.

Countries benefit from trading with each other just as much as families do.

Ten Principles of Economics #6: Markets are usually a good way to organize economic activity

In a market economy, the decisions of a central planner are replaced by those of millions of businesses and families. These businesses and households trade with each other in the marketplace, where prices and personal interests guide their decisions, as if guided by an "invisible hand" that elicits consensual market outcomes.

Prices guide these individual decision makers to outcomes that maximize the welfare of society as a whole in most cases.

Market economy: an economy in which resources are allocated through the decentralized decisions of many firms and households as they trade with each other in the market for goods and services.

Ten Principles of Economics #7: Government can sometimes improve market outcomes

There are two types of reasons for government intervention in the economy: to promote efficiency and to promote equality.

Economists use the term market failure to refer to situations in which the market itself does not allocate resources efficiently.

One possible cause of market failure is externalities. An example of pollution: if a chemical plant does not bear the full cost of emitting soot, it will do so in large quantities.

Another possible cause is market power. Assuming there is only one well in town, the owner of that well has market power over the sale of water.

The fact that government can sometimes improve market outcomes doesn't mean it always can.

Market failure: a situation in which the market itself cannot allocate resources efficiently.

Externality: the effect of one person's actions on the welfare of bystanders.

Market power: the ability of an economically active person to significantly influence market prices.

Ten Principles of Economics #8: A country's standard of living depends on its ability to produce goods and services

What explains the wide variation in living standards across countries and over time? The answer is surprisingly simple. Almost all changes in the standard of living can be attributed to differences in productivity across countries: differences in the amount of goods and services produced by a worker in an hour. Similarly, the rate of growth of productivity in a country determines the rate of growth of average income.

Productivity: the amount of goods and services produced by one worker in one hour.

Ten Principles of Economics No. 9: Prices Rise When the Government Issues Too Much Money

Inflation is a rise in the general level of prices in an economy.

What causes inflation? In most cases of severe or persistent inflation, the culprit outcome is always the same: an increase in the amount of money. When a government creates a large amount of its own currency, the value of the currency falls.

Inflation: a rise in the general level of prices in an economy.

Tenth of the Ten Principles of Economics: society faces a short-term alternating relationship between inflation and unemployment

It is often assumed that lowering inflation causes a temporary increase in unemployment. This alternating relationship between inflation and unemployment is known as the Phillips curve.

When the government reduces the amount of money, it reduces the amount that people spend. The combination of lower spending and high prices reduces the amount of goods and services sold by businesses. Lower sales in turn cause businesses to lay off workers, temporarily increasing unemployment.

The Phillips curve: the short-run alternating relationship between inflation and unemployment