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Principles of Economics

This document summarizes 10 principles of economics according to an economics textbook. It discusses concepts like tradeoffs, opportunity costs, incentives, supply and demand, and how markets and governments work. For each principle, it provides a short definition and a real-world example to illustrate the concept. The principles covered include: people face tradeoffs; 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; and society faces

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426 views26 pages

Principles of Economics

This document summarizes 10 principles of economics according to an economics textbook. It discusses concepts like tradeoffs, opportunity costs, incentives, supply and demand, and how markets and governments work. For each principle, it provides a short definition and a real-world example to illustrate the concept. The principles covered include: people face tradeoffs; 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; and society faces

Uploaded by

JAGATHESAN
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 2

10 PRINCIPLES OF
ECONOMICS

Dr. Nurul Syakima Binti Mohd Yusoff


Nicholas Gregory Mankiw

10 principles of economics
HOW PEOPLE MAKE

Principle 1
DECISIONS

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.
Life Example
A student faces a trade off between
studying for exam or to watch a much
awaited movie.
Principle 2
The Cost of Something is What You Give Up
to Get it

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 alternatives courses of
action
The OPPORTUNITY COST of an item is
what you give up to get that item.
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.
Principle 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.
Life Example
If you buy a used car, and plan to spend RM10,000,
but the car is only priced at RM6,000, would you
still buy it if it needed RM5,000 in repairs? Of course
not because
-u are a rational thinker and
-you would end up spending more than you planned
to.
Principle 4
People Respond to Incentives

Incentives: something that induces a person


act.
-it maybe punishment or reward
-people responds to incentive because
people make decision by comparing costs
and benefits
-incentives play a central roles in study of
economics
Life Example
-When gas prices rise, consumers buy more hybrid
cars and fewer gas guzzling SUVs.

- When cigarette taxes increase, teen smoking fall.


HOW PEOPLE

Principle 5
INTERACT

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.
Principle 6
Markets are Usually a Good Way to
Organize Economic Activity

Market economy: an economy that


allocates resources through the
decentralized decision of many firms and
households as they interact in markets
for goods and services.
-Household decide on what to buy and who
work for
-Firms decide what to produce and whom to
hire
Principle 7
Governments can Sometimes
Improve Market Outcomes

When a market fails to allocates


resources efficiently, the government can
change the outcome through public
policy. Examples are regulations against
monopolies and pollution.
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.
HOW THE ECONOMY

Principle 8
AS A WHOLE WORKS

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.
Life Example
-The United Stated is a highly productive country
-citizen of America are highly paid which grants
them the capacity and ability to afford better
standards of living.
-they can buy more TV sets, cars and maintain better
nutrition and healthcare
Principle 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.
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 increase it leads to excess
demand the produce 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.
Principle 10
Society Faces a Short-Run Tradeoff
Between Inflation and
Unemployment

Lower unemployment – higher inflation


Life Example
-during 2008 and 2009 US economy faced financial
crisis
-failure in the financial system and downturn in
stock market
-Failure lead to raise unemployment and fall in
income
-policymakers and president-reduced taxes and
increase govt. expenditure
-Apex bank-USA increased money supply
-goal-reduction in unemployment
THANK YOU

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