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7 Economic Principles

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Robyn Hick

on 7 September 2014

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Transcript of 7 Economic Principles

7 Economic Principles

3. Thinking at the Margin
Definition- Thinking at the Margin tells us that most of the decisions we make each day involves choices about a little more or little less of something rather than making a wholesale change. Making decisions at the margin involves comparing marginal costs and benefits. The Marginal cost is what you give up to add one unit to an activity. The Marginal benefit is what you gain by adding one more unit.

Trade makes people better off

Trade makes people better off
Trade makes people better off
Principle #1: Scarcity Forces Trade-offs
Definition- Scarcity Forces Trade-offs reminds us that limited resources force people to make choices and face trade-offs when they choose.
Future Consequences Count
Definition- Future Consequences Count tells us that decisions made today have consequences not only for today but also in the future.

Example- An example of Future Consequences Count is when you make a decision today to cut yourself, your consequence today will be harming yourself and being in pain. And your Future consequence is having the scars for the rest of your life and living with having to remember that forever.
Incentives Matter
Definition- Incentives Matter simply says that people respond to incentives in generally predictable ways.

Costs Versus Benefits
Definition- Cost versus benefits tells us that people choose something when the benefits of doing so are greater than the costs.
Markets Coordinate Trade
Definition- Markets Coordinate Trade says
that markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers.

You have to give up something to get something else. For example, you have to pay to get a new shirt. You had to give up that money to get the new shirt.

When your choice costs you something and what you get out of it is better. For example, a cost would be, being late to class and the benefit would be, more time to talk to friends.

Example- An example of incentives matter is the deal that the haircut company, Supercuts, gives you. To get their customers to keep coming back, they give out this card that keeps track of haircuts you get. The incentive to come back is that every 9th haircut that you get is free.
That by focusing on what we do well and then trading with others, we will end up with more and better choices than by trying to do everything for ourselves.

Example- You get into your car and turn the key and nothing happens. You or your friend are not mechanics, so you push your car to the nearest gas station for help. The mechanic on duty quickly diagnoses the problem as a dead battery. You offer to trade your two tickets for that night's concert for a new battery. The mechanic agrees, and your car is soon running again.
Someone needed a fish and someone needed corn. The person that had the fish needed corn and the one that had the corn needed fish. So they traded.
The 7 Principles of Economics are,
Scarcity Forces Trade-offs, Costs Versus Benefits, Thinking at the Margin, Incentives Matter, Trade makes people better off, Markets Coordinate Trade, Future Consequences Count

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