12 Principles of Economics
Economics is defined as “the study of how people establish social arrangements for producing and distributing goods and services to sustain and enhance human life. Its main goals are both to understand these arrangements and to improve them, seeking the best possible allocation of our scarce resources”. After the Great Depression a man by the name of Adam Smith also known as ‘The Father of Economics’ created economics. Smith was influenced by many of their ideas and expanded them into a thesis about how economies should work, as opposed to how they do work.
Economics consists of two branches which are microeconomics and macroeconomics. Microeconomics is the branch of economics that deals with the decision’s individuals make that can affect the economy. For example, consumer behavior, households, workers, and companies. Macroeconomics is about the decisions of major companies and firms that affects the economy. Some examples of macroeconomics are markets, governments, cooperation etc. The study of economics consists of twelve principles which was created to assist with maintaining a steady economy.
The first principle of economics is “Choices are necessary because resources are scarce”. This simply means that you must make smart decisions or try to make the best decision because there aren’t enough resources to fulfill productive usage. Resources are anything that can be used to produce something, for example entrepreneurship, land, labor and capital. An example of this principle is making a choice between saving up for college or buying a car, or deciding which food store to go to, to get cheaper groceries.
The second principle is “The true cost of something is its opportunity cost”. An opportunity cost is what you are willing to give up to get what you want in terms of goods and services. This principle you will know the actual value of something by when you compare its value to the value of something else. For example, you are business major signing up for course for the spring semester you see want to do a music course because you like music, but you also must take an economics course which is required for your major. What is the opportunity cost of you taking music over economics?
The third principle of economics is ““How much” is a decision at the margin”. In order to make the decision ‘how much’ you must use trade-off. Trade-off is a comparison between costs and benefits. Trade- off assists you with knowing which choice is the best and the most beneficial for you. To create a ‘decision at the margin’ you should use marginal analysis, which is a decision about if you should do a little bit more or a little less. An example of this principle is How much jog an extra mile before I take a break, or should I take a break and jog an extra mile later?
The fourth principal of economics is “People usually respond to incentives, exploiting opportunities to make themselves better off”. An incentive is defined as something that motivates or encourages someone to do better. For example, if people with “MBA’s are making more than lawyers you would expect more people to be enrolled in business schools that law schools.” People usually do what is in their best interest.
In the market economy, people exchange what they have to receive goods or service in return. This brings me to the fifth principle “There are gains from trade”; gains from trade is almost self- explanatory, it is you can get of what from trading than trying to do it on your own. Trade allows us all to consume more than we could otherwise. With trade taking place it increases consumer and producer surplus from lowers tariffs. An example of this is doctors heals people and a mechanic fixes car. A doctor wouldn’t have enough time or as much knowledge as a mechanic to fix a car and neither will a mechanic having sufficient knowledge or time to heal a person or study the different kinds of medicine.
The sixth principle is “Markets move towards equilibrium”. The word equilibrium means balance; an equilibrium is when there is no difference in doing something different. It is important for policy makers to keep a steady economy, so the economy would not fail like it did decades ago. An example of this is if the market price is above the equilibrium there is an excess in supply and if the market price is below the equilibrium then there is an excess in demand.
The seventh principle is “Resources should be used efficiently to achieve society’s goals”. When an economy can take all of its opportunities to make some people better off without making them worse off is called an efficient economy. To achieve society’s goals there must be equity, which means that everyone will get a fair share. Society should use resources in the most beneficial way. An example is there is limited time to work on the presentation required for our job’s year end meeting. Therefore, they decided to meet up at different times depending on their availability.
The eight principle is “Markets usually lead to efficiency”, as mention in the previous paragraph efficiency is the act of an economy using all its opportunities to make people better off. People usually take opportunities for mutual gain. For example, the students of Central State University uses Schoology to sell items such as used books, appliances and furniture rather than just giving them away.
Principle number nine is “When markets don’t achieve efficiency, government intervention can improve society’s welfare”. This simply means that when the economy cannot use all of its opportunities for the betterment of the people the government will have to step in and help the economy back to efficiency. For example, state governments mandate that it is illegal to drive without passing a driving exam. This is enforced because this makes the roads safer.
The tenth principle is “One person’s spending is another person’s income”. This principle is self- explanatory when one person purchases an item it becomes the seller’s income. An example of this principle is you buy a used textbook from your roommate then your roommate uses the money to purchase an items card. This example shows how one person’s spending is another person’s income.
The eleventh principle is “Overall spending sometimes get out of line with economy’s productive capacity”. Upon the completion of a hurricane striking several islands within The Bahamas there were rumors that the gas stations in The Bahamas were low on oil and they wouldn’t be receiving more anytime soon,bso many car owners bombarded nearest gas station to full up their gas tanks due to this gas prices increased tremendously. There must be a balance between buying and producing. Without their being a balance it would cause prices to raise tremendously.
The twelve and final principal of economics is “Government policies can change spending”. When overall spending gets out of line with the economies productive policy government would have to implement polies to help the economy manage their spending. For example, your parents’ after tax income has increased because of a tax cut by congress. They therefore increase your allowance, which you spend on spring break vacation.
With the implementation of these twelve principles, we are able to reduce the possibilities of the economy going back into the great depression. These principles policy makers manage the economy by providing the correct economic guidelines.
