What is the principle of economics? The principles of economics provide an analytical foundation for studying the economy. These principles are based on economic theory and research. They intend to give a general framework to help in developing and using analytical skills.
Economics studies the use of scarce resources by people in satisfying unlimited wants. 'What are the 10 principles of economics by Gregory Mankiw?' and 'Who gave 10 principles of economics?' You might ask. We analyze the ten principles by Gregory Mankiw that involve scarcity, whether at the individual, group, or societal level.
Mankiw 10 Principles of Economics
What are the main principles of economics? Many economic students ask. Here is a breakdown of the ten principles of economics and how markets work by Gregory Mankiw:
Trade-offs Available
What is the 1st economic principle? The first principle that Mankiw discusses is the principle of trade-off. This principle means that people have to choose between what they want and need. This is because they can't have everything.
Life is full of trade-offs. It can either be between buying a new car or a new house. Mankiw suggests that society faces three big trade-offs: efficiency vs. equity, growth vs. environmental protection, and government involvement vs. market forces.
This principle is essential in understanding how economists make decisions based on what's available to them and what they can accomplish. In other words, when working with a limited amount of resources (and we all are), what's the best way to use them? This principle applies to every aspect of economics and society as well.
Opportunity Cost
Opportunity costs refer to what you are willing to give up for another item. For example, purchasing a shoe for $50 means that your opportunity cost is $50. Furthermore, the same applies in other instances in life.
When an opportunity cost does not fetch a monetary value, it becomes a forgone opportunity. For example, you must forego your favourite food to cut your weight gain.
Marginal Thinking
Principles of economics often work on a small scale. For example, the gradual rice of pizza price might cause you to eat less pizza. However, the same principle applies on a larger scale. If your income rises, you might buy a bigger TV or rent a nicer apartment. In each case, you make decisions by comparing the benefits over the costs.
In other words, economists practice marginal thinking. A good way to understand many economic concepts is to think about how you would transform your behavior if some prices changed by a small amount.
People Respond to Incentives
The notion of self-interest equates to incentives. Most economists assume people are in a rush to better their overall lifestyle. When people take actions that lead to higher utility, they act upon incentives.
You can take incentives in both positive and negative lights. A positive incentive refers to a reward that encourages action — say, a cash prize for winning a contest. A negative incentive is a penalty that discourages an action.
Trade Means a Better Life
This is the most counter-intuitive principle in economics. It seems to go against human nature. Most of us grew up thinking that if somebody gets something, it means we lose. When your sister gets a bigger piece of the pie, you get less. When a foreigner buys a pair of shoes made in the United States, some U.S. worker loses out on a job.
Economists have discovered that trade does not equal a zero-sum game. Therefore, when one gains, another one loses. Trade can create new wealth so that everyone can gain from it.
Many Markets are Competitive
Competitive markets allow people to set prices while determining the amount of products available. The invisible hand is a metaphor for the unseen forces that move the market economy.
In a competitive market, competition among sellers lowers prices. Thus, encouraging producers to increase productivity in line with what consumers’ demands. The competition that exists with buyers raises prices. Thus, it encourages consumers to look for other alternatives when a particular good’s price rises.
Governments Improve Market Outcomes.
A competitive market achieves equilibrium at the intersection of supply and demand. If the government enacts a binding price ceiling (rent control), it will create a shortage. If the government enacts a binding price floor (such as the minimum wage), it will generate a surplus.
A common rule of thumb implies that markets operate in a manner that it organizes its own activities.
However, some instances occur where the market outcomes aren’t efficient. But there are many cases where the market outcome is not efficient. These inefficiencies provide an opportunity for government policies to offset imbalance in the market.
A Country's Productivity Determines Living Standards
The most important single factor in determining economic growth is within the scale of productivity. This refers to overall goods and services that a worker can produce in a unit of time.
Trade can make everyone better off. Although we tend to think of countries as being more developed than others, individuals within any country are at different stages along the road to economic development.
The government can sometimes improve market outcomes. The government attempts to improve market outcomes through various policies, including tariffs, taxes, subsidies, price floors, and price ceilings.
Inflation touches on the steady rise of prices for products in the market. It means that each dollar buys fewer goods and services over time.
Government Raise Prices by Printing More Money
One common result of too much money in the economy is steady prices. In other words, inflation occurs. The basic increased supply of products in the market causes prices to fall. The more money in the economy, the more people get to share it.
And since everyone has a limited amount of time, they have less time to purchase each currency unit. Thus, they value each dollar less and demand fewer goods and services for each dollar.
A Trade-off Exists Between Unemployment and Inflation
The last principle of economics that we will discuss is the principle of trade-offs. We always wish we could have something else in any given situation. We can't have everything. But by making one thing more of it, we usually have to make something else less of it. In other words, there is no such thing as a free lunch.
Economists use opportunity cost to refer to the highest-valued alternative that must be sacrificed when an economic decision is made. The concept of opportunity cost applies as much to nations as consumers or firms. To illustrate its application, let's consider a simple example of an economy that produces only two goods: wheat and corn.
Final Takeaway
We hope this article makes economics a little more understandable with what are the principle of economics. Also, it gives you the tools to make better decisions in life and business. However, you can always turn to Acemyhomework for professional help with your economics assignment.
