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Ten Basic Principles of Economics

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Brandon Stroud

on 1 February 2013

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Transcript of Ten Basic Principles of Economics

photo credit Nasa / Goddard Space Flight Center / Reto Stöckli Constructed by:Brandon Stroud The Ten Basic Principles of Economics Principle #1: People Face Tradeoffs In our life, nothing is ever free. Principle #2: The cost of something is What you give up to get it. Decisions require you to compare costs and benefits of alternatives. Principle #3: Rational people think at the Margin Economists make an assumption that people are rational. Therefore it is the moment when they make a small adjustment to the plan that they have thought out in their head. Principle #5: Trade can make everyone better off. People and Countries gain good things that they might need from trade. Principle #7: Governments can sometimes improve market outcomes Principle #9: Prices rise when the government prints too much money. There is always a cost to anything that we do. For Instance There is also something called opportunity cost and is defined as, what you give up to get an item. If I was invited to a friends house to eat a delicious
hickory smoked Bar-B-Q beef brisket but had to
stay home and do extra-credit for an important
class, I would be making a decision by opportunity
cost, and how hungry I was to either stay at home and do the extra-credit or go to my friends house
and enjoy such a savory meal for dinner. Lets say that someone asks me for a ride home,
if I were to give them a ride home then I would be
giving up my own time and gas that I could use on
studying, playing, hanging out, etc. Rational people systematically and purposefully do the best they can to achieve their objectives. If you plan to go to a dance and then while you are
there decide whether to talk to a girl that caught your eye, is how people think at the margin by marginal change which is a small incremental adjustment to a plan of action. Principle #4: People respond to Incentives Whenever marginal changes in
cost or benefits happen, it
motivates people to respond. So.....when people like or see
something that is better than what
they have then they will respond
to the better objective. Lets say that a child goes to a
store, and while he is in the store
he see's a toy that he wants to buy, but as soon as he is about to pick that toy up he notices a sign that say's "buy one get one free"
so as an inexperienced child he runs over to his parent and tries to convince his parent to buy that toy without looking at the price. By competition people gain from trading. Trade allows people and countries to specialize in what they do best with a better variety of goods and services. Principle #6: Markets are usually a good way to organize economic activity Since markets are such a good way to organize economic activity, most countries are developing a market economy which is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. In a store managers decide what the price should be and who the audience is or who they are targeting. If we all lived by making our own food and clothes then there would be no trade, but because of trade we compete to find the lowest prices for our goods to get more consumers. Example Example When the market fails, the government can intervene to promote efficiency and equity. Market economies need institutions to enforce property rights, which is the ability of an individual to own and exercise control over scarce resources. Market power is the ability of a single person or firm to unduly influence market prices. Principle #8: The standard of
living depends on a country's
production. The differences in living
standards around the world are always staggering. When you are comparing
anything with money, it is
called the standard of living,
which people do every day without
knowing it. Productivity is the amount of goods and services produced from each hour of a worker's time. Inflation is one of the main reason why prices rise too, and is defined as an increase in the overall level of prices in the economy. When the government makes large amounts of money, the value of the U.S. dollar goes down. Principle #10: Society faces a short-run tradeoff between inflation and unemployment. When there is inflation then the unemployment levels go down, but when there is no inflation then unemployment goes up. This is called a short-run tradeoff between inflation and unemployment. A Business Cycle is fluctuations in economic activity, such as employment and production.
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