Ten principles of economics
Scarcity means that society has limited resources and therefore cannot produce all
the goods and services people wish to have
Economics is the study of how society manages its scarce resources
Economists study how people make decisions: how much they work, what they
buy, how much they save, and how they invest their savings. They also study how
people interact with one another.
How people make decisions
Principle #1: People face tradeoffs
“There is no such thing as a free lunch” which basically means to get one thing that
we like, we usually have to give up another thing that we like. Making decisions
requires trading off one goal against another.
Efficiency means that society is getting the most it can from its scarce resources.
Equity means that the benefits of those resources are distributed fairly among
Principle #2: The cost of something is what you give up to get it
The opportunity cost of an item is what you give up to get that item.
Principle #3: Rational people think at the margin
Rational people are people who systematically and purposefully do the best they
can to achieve their objectives, given the opportunities they have.
Economists use the term marginal changes to describe small incremental
adjustments to and existing plan of action.
Rational people often make decisions by comparing marginal benefits and marginal
A person’s marginal benefit is the maximum amount they are willing to pay to
consume that additional unit of a good or service. In a normal situation, the marginal
benefit will decrease as consumption increases.
Marginal cost is the change in total cost that arises when the quantity produced
changes by one unit. That is, it is the cost of producing one more unit of a good.
A rational decision maker takes an action is and only if the marginal benefit of the
action exceeds the marginal cost.
Principle #4: People respond to incentives
An incentive is something (such as the prospect of a punishment or a reward) that
induces a person to act. How people interact
Principle #5: trade can make everyone better off