1. People face tradeoffs. This is because resources are always scarce. You need to determine what is more important.
2. Cost of Opportunity : The direct and indirect cost you incur to avail a facility.
3. Rational People Think at the Margin : A rational decision maker only takes action if and only if the marginal benefit of the action exceeds the marginal cost.
4.People Respond to Incentives : How does a seat belt law effects auto saftey? People respond to seat belt law as they would to an improvement in road conditions, by faster and less careful driving. The end result of seat belt law is thus more accidents.
The above 4 laws tries to establish how people take decisions. The next 3 will tell how people interact with each other.
5. Trade can make everyone better off. Trade allows each person to specialize in a what they do best and enjoy a greater variety of goods and services. The same holds true for countries as well.
6.Markets are usually a good way to organize economic activity : Adam Smith and his concept of the "Invisible Hand". By pursuing his own interests, he frequently promotes that of the society mre effectually, rather then when he actually intends it. Individuals are motivated by "Self Interest" and the "Invisible Hand of the Market Place".
7. Governments can sometime improve market outcomes: Most policies from govt are either to increase the economic pie or change how the pie is distributed. Market Failure : Market on its is not able to allocate the resources efficiently.
Causes of market failure :
i) Externality : the impact of one person's action on well being of a bystander. Eg : Pollution
ii)Market Power : the ability of a single economic actor to to have a substantial influence on mkt prices.
A goal of many public policies is to achieve a more equitable distribution of economic well being.
The next 3 principles concern the working of the economy as a whole.
8. A country's living standard is dependent on its ability to produce goods and services.
- Growth rate of a nation productivity determines the growth rate of nation's income
- Budget Deficits of a government are generally thought to depress growth in living standards. This is attributed to the fact that the loan taken by govt from market would reduce the amount available for other programs.
9. Prices rise when the government prints too much money.
Inflation can be defined as the increase in overall level of prices in the economy. Rapid growth in quantity of money causes inflation.
10. Society faces a short run trade-off between inflation and unemployment
Reduction in inflation cause Unemployment. This is a temporary effect but lasts for years.
Philips curve: Curve illustrating trade off between inflation and unemployment.
