Ten principles of Economics

Gregory Mankiw in his Principles of Economics outlines Ten Principles of Economics that will replicate here, they are:

*People face trade-offs
*The cost of something is what you give up to get it
*Rational people think at the margin
*People respond to incentives
*Trade can make everyone better off
*Markets are usually a good way to organize economic activity
*Governments can sometimes improve market outcomes
*A country's standard of living depends on its ability to produce goods and services
*Prices rise when the government prints too much money
*Society faces a short-run tradeoff between Inflation and unemployment.

1. Economics “Economy” comes from A Greek word “ Oikonomous ” for “one who manages A household Economics is the study of how society manages its scarce resources.

2. According to Adam Smith , “Economics is the social science that studies the production, distribution and consumption of goods and services.” According to the Oxford English dictionary , “Economics is the branch of knowledge concerned with the production, consumption, and transfer of wealth”. 

3. A household and an economy face many decisions: Who will work? What goods and how many of them should be produced? What resources should be used in production? At what price should the goods be sold?

4. Ten principles of economics How people make decision How people interact How the economy as a whole works

5. How people make decisions People face trade-offs The cost of something is what you give up to get it Rational people think at the margin People respond to incentives

6. P-01: people face trade-offs Trade off is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect.

7. Society faces trade off between Efficiency & Equity Efficiency:- society getting the most from its scarce resources . Equity :- Distributing economic prosperity fairly among the individuals of the society.

8. Life Example A student faces a trade off between studying for exam or to watch a much awaited movie.

9. P-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 . Nothing comes for free in this world. You need to give up some thing in order to gain something. Making decisions requires comparing the costs and benefits of alternative courses of action. The OPPURTUNITY COST of an item is what you give up to get that item.

10. Life Example Athletes who can earn millions if they drop out of school and play professional sports are well aware that their opportunity cost of college is very high. Cricketer Sachin Tendulkar decided to quit his education in order to play professional cricket for his country.

11. P-3: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.

12. Life Example Ex :  If you buy a used car, and plan to spend $10,000, but the car is only priced at $6,000, would you still buy it if it needed $5,000 in repairs? of course not because 1) you are a rational thinker and 2) you would end up spending more than you planned to.

13. P-4: People respond to incentives. Incentives: Something that induces a person to act It may be punishment or reward People responds to incentive because people make decision by comparing costs and benefits Incentive plays a central roles in study of economics. Incentives are crucial to analyzing how market work

14. Life Example When gas prices rise , consumers buy more hybrid cars and fewer gas guzzling SUVs. When cigarette taxes increase, teen smoking fall

15. How people interact Trade can make everyone better off Markets are usually a good way to organize economic activity Governments can sometimes improve market outcomes.

16. P-5: 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.

17. P-6: Markets are usually a good way to organize economic activity An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services . Market economy: a) allocates resources b) decentralized decisions c) firms and households as they interact Households decide what to buy and who to work for. Firms decide who to hire and what to produce.

18. Markets are usually a good way to organize economic activity Adam Smith… Firms and household interacting in markets “The invisible hand”

19. P-7: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.

20. Life Example A dry cleaning factory can cause water pollution when they dispose off used chemicals. Government has a task of regulating, auditing and monitoring the activities of the market. Thus they can introduce regulating policies to protect the environment.

21. How the economy as a whole works The standard of living depends on a country’s production. Prices rise when the government prints too much money Society faces a short-run tradeoff between inflation and unemployment

22. P-8: The standard of living depends on a country’s production. 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 . Standard of living may be measured By comparing personal incomes. By comparing the total market value of a nation’s production

23. P-9: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.

24. Life Example When there is a lot of money in circulation in the economy, then the income of the consumer rises and this will push up the demand for goods and services. If purchasing power increases it leads to excess demand the producer will not the able to fulfill the demand , and since excess doesn't exist in the market, the producer will increase the price. This will lead to inflation.

25. P-10: Society faces a short-run tradeoff between inflation and unemployment Phillips curve: shows short-run trade-off b/w inflation & unemployment. Lower unemployment-Higher inflation. Inverse relation b/w unemployment & inflation . Monetary Policy - instruments of control.