Ten Principles of Economics

Ten Principles

There is no mystery to what an “economy” is. Whether we are talking about the economy of Los Angeles, of the United States, or of the whole world, an economy is just a group of people interacting with one another as they go about their lives. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we start our study of economics with four principles of individual decisionmaking.

How People Make Decisions

PRINCIPLE #1: PEOPLE FACE TRADEOFFS

PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT

PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN

PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES

The first four principles discussed how individuals make decisions. As we go about our lives, many of our decisions affect not only ourselves but other people as well. The next three principles concern how people interact with one another.

How People Interact

PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF

PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY

PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES

We started by discussing how individuals make decisions and then looked at how people interact with one another. All these decisions and interactions together make up “the economy.” The last three principles concern the workings of the economy as a whole.

How The Economy As A Whole Works

PRINCIPLE #8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES

PRINCIPLE #9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY

PRINCIPLE #10: SOCIETY FACES A SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

Conclusion

You now have a taste of what economics is all about. In the coming chapters we will develop many specific insights about people, markets, and economies. Mastering these insights will take some effort, but it is not an overwhelming task. The field of economics is based on a few basic ideas that can be applied in many different situations.

Throughout this book we will refer back to the Ten Principles of Economics highlighted in this chapter and summarized in Table 1-1. Whenever we do so, a building-blocks icon will be displayed in the margin, as it is now. But even when that icon is absent, you should keep these building blocks in mind. Even the most sophisticated economic analysis is built using the ten principles introduced here.

Source: Mankiw N.G. Principles of economics (3 ed., Thomson, 2003)

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