Although the study of economics has many
facets, the field is unified by several central ideas. The Ten Principles of
Economics offer an overview of what economics is all about.
- People Face Tradeoffs.
To get one thing, you have to give up something else. Making decisions
requires trading off one goal against another.
- The Cost of Something is What You Give Up to Get It.
Decision-makers have to consider both the obvious and implicit costs
of their actions.
- Rational People Think at the Margin.
A rational decision-maker takes action if and only if the marginal
benefit of the action exceeds the marginal cost.
- People Respond to Incentives.
Behavior changes when costs or benefits change.
- Trade Can Make Everyone Better Off.
Trade allows each person to specialize in the activities he or she
does best. By trading with others, people can buy a greater variety
of goods or services.
- Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they
are guided by an "invisible hand" that leads the market to allocate
resources efficiently. The opposite of this is economic activity that
is organized by a central planner within the government.
- Governments Can Sometimes Improve Market Outcomes.
When a market fails to allocate resources efficiently, the government
can change the outcome through public policy. Examples are
regulations against monopolies and pollution.
- A Country's Standard of Living Depends on Its Ability to Produce
Goods and Services.
Countries whose workers produce a large quantity of goods and services
per unit of time enjoy a high standard of living. Similarly, as a
nation's productivity grows, so does its average income.
- Prices Rise When the Government Prints Too Much Money.
When a government creates large quantities of the nation's money, the
value of the money falls. As a result, prices increase, requiring more
of the same money to buy goods and services.
- Society Faces a Short-Run Tradeoff Between Inflation and
Reducing inflation often causes a temporary rise in unemployment.
This tradeoff is crucial for understanding the short-run effects of
changes in taxes,government spending and monetary policy.
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