10 basic principles of economics
We have limited or scarcity resources.
Time, money, relationship... we use these to get something we want.
Social also have scarcity resources, and study about managing it is economics.
How people make decisions
1. Every choice has a price.
There is no free lunch. If we choose one, we have to give up the other.
For example, relation between efficiency(maximize income) and equality(distribute equally) is 'trade-off'.
Just like non-commute operator?
2. The price of a choice is something we give up to get it.
The cost of choosing something is not just the cost of making that choice, but also includes the benefits of not making that choice.
This concept is ‘opportunity cost’.
3. Rational judgment is made marginally.
You must decide whether to carry out the original plan as is or to make some modifications. This is called a marginal change.
4. People respond to economic incentives.
The possibility of punishment or reward motivates people's behavior. This is called economic incentive.
How people interact
5. Free trade benefits everyone.
A transaction benefits both parties by getting what they need. The competition that naturally occurs at this time improves the quality of transactions.
6. In general, markets are a good means of organizing economic activity.
Through historical experience, we have come to realize that a ‘market economy’ that allows the market to lead the economy rather than the government directly controlling the economy is reasonable. This theory is called Adam Smith’s ‘invisible hand’.
The saying that the market determines the economy means that individuals participating in transactions are left to pursue their own interests and compete. The invisible hand links the pursuit of private profit with improving the economic welfare of society as a whole.
7. In some cases, governments can improve market performance.
The invisible hand is not perfect, and there are times when government intervention is needed to help markets develop.
First, property rights must be guaranteed so people can focus on making money with peace of mind.
Second, market failure occurs due to external effects (such as environmental pollution) that affect the economic welfare of a small number of people, and the market fails to distribute resources efficiently.
Lastly, when a few people have strong market power, such as a monopoly, it can reduce the efficiency of the economy.
In addition, government intervention is necessary not only to increase economic efficiency but also to improve equity.
How does the country's economy work
8. A country's standard of living depends on its productive capacity.
The people's standard of living comes from productivity. There may be other reasons, but this is the most important.
9. If the money supply increases too much, prices rise.
When the money supply increases sharply, the value of the currency falls and prices rise, causing inflation.
10. In the short run, there is a trade-off between inflation and unemployment.
When inflation occurs, spending and demand increase in the short term (1 to 2 years), so companies try to increase production. Therefore, the employment rate increases and the unemployment rate decreases.
This relationship is important in understanding the business cycle, in which indicators of economic activity change periodically.
Reference
N.Gregory Mankiw - Principles of Economics