An Explanation of the Ten Principles of Economics

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When talking about a list of economic principles, this most commonly refers to Gregory Mankiw’s “Ten Principles of Economics.” The list is a set of principles about the way economics should work. The 10 principles are divided into three categories: decisions people make, the work of the economy as a whole and people interactions.

Decisions Involve Tradeoffs

This refers to the concept of making compromises. A person may have to give something up to get something else they want more. For example, say you are offered a chocolate bar or a lollipop. You have to choose to give up one to get the other.

Opportunity Cost of Resource

The second economic principle emphasizes the cost of whatever it is you gave up. For example, you took the lollipop, which has an economic profit, what you gain from the choice, of $.85. But you had to give up the chocolate, which had an economic profit of $.45. So you actually only gained $.40 for your choice. But if you didn’t have a choice and were only offered the lollipop, you wouldn’t have given anything up and would have gained an economic profit of $.85.

Cost-Benefit Analysis

This principle can be a little difficult to grasp. Marginal thinking is to make small adjustments. For example, a movie theater offers matinee prices. The theater knows fewer people see movies in the afternoon. The standard ticket price of the movie is $10 and at that price the theater will sell two tickets for a matinee show. But by offering a $6 matinee price, the theater ended up selling five tickets. By selling the tickets at a 40 percent discount, the theater actually made $10 more.

Response to Incentives

People respond to different incentives in good or bad ways, but the point is that we respond. A bar might offer a buy one, get one free drink. The good side of the incentive is free drinks, the bad side might be a college student who forgoes studying to drink. Either way, the response to the incentive was there.

Trading Services for Money

It is important to clarify that trades include using money to pay for something. Say someone is skilled at giving massages. You get the massage, relying on this person, and then trade your money as a payment.

Markets Organize Economic Activity

Markets are defined simply as a place where people make an agreement, settle on a price and then communicate that to the world at large. The food market, for example, has farmers making an agreement to sell at a set price and then supermarkets communicate that by selling the food to the public.

Government and Market Efficiency

The government may get involved if the market efficiency isn’t working or if the market is failing to distribute. This failure is often caused by externality, which means that the product impacts more than just the direct buyers and sellers. For example, cars benefit drivers, but emissions are also a health concern for people.

Principal of Productivity

Simply put, this principle is productivity. The richer the country, the higher the level of productivity.

Too Much Money Causes Inflation

This principle refers to inflation. Prices go up to reflect the amount of money being printed. While the more money makes people think they’re wealthier, inflation causes prices to go up and that money loses some of its value.

Inflation and Unemployment Tradeoff

Also referred to as the Phillips Curve, this principle says that you can’t keep unemployment low and inflation under control at the same time and, therefore, create a tradeoff.

References

About the Author

Melissa Hamilton began writing professionally in 2007. She has enjoyed cooking creatively in the kitchen from a young age. In addition to writing cooking articles for various publications, she currently works in the restaurant industry as a food and beverage trainer.