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Ten Principles of Economics
Transcript of Ten Principles of Economics
design by Dóri Sirály for Prezi
People Respond to Incentives
Without incentives, people would have no motivation to participate in the economy. This doesn't make people selfish, it simply makes them logical. Every action, especially within the economy, is taken in order to benefit whoever is taking such actions. This is even true for people who donate to the less fortunate; in one way or another, they benefit even in giving away their money.
Rational People Think Within the Margin
This essentially means that people try to achieve the best outcome in virtually any situation. They focus on the best deals or the best products, which allows competition to exist in the market. The natural desire for people to get the best possible "anything" serves as an incentive for producers to create the best.
Coercion Magnifies Market Inefficiency
The more coercion that exists within a market, the less efficient that market is. Because people are motivated by incentives, it is easy to manipulate the incentives workers respond to and create coercion that results in exploitation rather than production. If entities partake in the selfish utilization of their workers and products for personal profit instead of working to benefit the free market, the market becomes subsequently less efficient.
There's No Such Thing as a Free Lunch
Without an understanding of this fundamental principle, those working to improve the economy and citizen well-being cannot achieve either of those goals. For example, the implementation of so called "free" health care. The health care may not cost those who are initially receiving it, but because nothing is free, the cost for people who don't pay for their health care directly comes out the pockets of taxpayers and the government.
Desires are Infinite, Resources are Finite
Those who support socialized medicine base their beliefs as if desires and resources are both infinite. Unfortunately this is not the case. For an economy to function efficiently we must recognize that we have to allocate resources best way possible, always keeping in mind that they are limited. There has to be a balance between how many goods/services are provided for "free" and how many desires are left unfilled by the government.
Free Trade is Perceived Mutual Benefit
Because people act on their incentives and think within the margins, peaceful free trade exists on the idea of mutual benefit. We make in trade-offs through this process. When a man buys a car, he gives up his money for it. The dealer sells the car to earn the money. Both parties benefit from what is essentially trade, and would not have gone through with the sale if it did not benefit each of them in what they perceive to be the best way possible.
People Face Trade-offs
This principle is the basis for cost-benefit analysis. It's a known fact that no one can get everything they want all at once, and therefore trade-offs are necessary. People weight the cost of getting something they want and the benefits from achieving that goal. For example, if a mother works a demanding job, she either sacrifices work hours and money to spend more time with her kids, or spends less time at home to produce a higher income.
Capital Magnifies Market Efficiency
Capital works with the "invisible hand" to create a productive market in which trade can exist between virtually anyone. This is where the concept of currency improves standard bartering. If people were constantly trading tangible products for others, the market would be inefficient; certain items are only valuable to certain people. With money, a person can produce one thing, get money for it, and spend that money on an entirely unrelated product. Essentially they have traded for that product with what they produced, but money allows this trade to benefit both parties equally.
Supply and Demand Magnify Resource Efficiency
One of the biggest incentives people respond to—though they do so subconsciously—is the incentive to create market equilibrium. In other words, consumers demand for more products, and producers try to supply enough to meet those demands. Making money by filling the markets demands ensures that resources are used to the best of their abilities; they are used efficiently. People responding to the supply-demand incentive allocate and utilize resources to achieve that equilibrium.
The Invisible Hand Allows for Indirect Trade
The "invisible hand" is a term for a market force that makes it possible for economic activity to function at a higher level than it would on the acts of an individual. This concept is why international trade can exist; more than one entity is involved in the exchange of international goods. Though the initial seller of a product will most likely never meet the customer, the "invisible hand" facilitates the transaction and allows for indirect trade.