Chapter : 1

Ten Principles of Economy

Author: Sharif Memon

What is Economics?
The study of how society manages its scarce resources. Scarcity Scarcity means the society has limited resources and therefore cannot produce all the goods and services people wish to have.

Economy An economy is just a group of people interacting with one another as they go about their lives. Managerial Economics the applications of economics to the real business activities, so as to get the desired business results mean Managerial Economics.

Ten Principles of Economics

How People Make Decision Ten Principles of Economics How People Interact

How the Economy as a Whole Works

Principle # 1 : People Face Tradeoffs

There is no free lunch Making decision requires trading off one goal against another. The classic tradeoff is between guns and butter
Efficiency: The property of society getting the most it can from its scarce resources. Equity: The property of distributing economic prosperity fairly among the members of society.

Principle # 2 : The Cost of Something is What You Give Up to Get it.

Decision making requires comparing the Costs and benefits from the alternative. The cost of some action is not as obvious as it might first appear. This Principle lack the time factor
Opportunity Cost: Whatever must be given up to obtain some item.

Principle # 3 : Rational People Think at the Margin

Decision in life are rarely black or white The decisions involves shades of gray The Popular Adage: It is good to aspire for No.1 position but there is no disgrace to achieve second or third position. People behave rationally and thus accepts marginal changes
Marginal Changes: Small incremental adjustments to a plan of action.

An Airline Example.

Principle # 4 : People Respond to Incentives.

Decisions are based on Costs & Benefits Rational consumers look for profitable deals. The consumes want to keep their expense bracket in tact. The concept of Marginal change do influence here. An apple & Orange Example.

Principle # 5: Trade Can Make Everyone Better off.

Trade brings the world together. Countries as well as families benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. Trade brings in Innovation and Invention.

Principle # 6: Markets Are Usually a Good Way to Organize Economic Activity The government could organize economic activity in a way that promotes economic well-being for the country as a whole. Market determines the demand for the product Central planners decided what goods and services were produced, how much was produced and who produced and consumed these goods and services.
Market Economy: An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Free markets contain many buyers and sellers of numerous goods and services and all of them are interested primarily in their own well-being.

Principle # 7 : Government Can Sometimes Improve Market Outcomes There are two broad reasons for a government to intervene in the economy: to promote efficiency and to promote equity.
Externality: The impact of one persons actions on the well-being of a bystander. Market Power: The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

A market economy rewards people according to their ability to produce things other people will to pay for. Public policy is made not by angels but by a political process that is far from perfect.

Principle # 8 : A Countrys Standard of living depends on its ability to produce Goods and Services. The large variation in the average income of two countries is reflected in various measures of the quality of life Citizens of high-income countries have more TV sets, more cars, better nutrition, better health care and longer life expectancy than citizens of low-income countries.
Productivity: The amount of goods and services produced from each hour of a workers time.

Principle # 9: Prices Rise when the Government Prints Too Much Money

In Germany in January 1921, a daily news paper cost 0.30 marks. Less than two years later in November 1922, the same newspaper cost 70,000,000 marks.
Inflation: An increase in the overall level of prices in the economy.

Inflation Public Enemy number one What causes Inflation? Growth in the Quantity of Money

Principle # 10: Society faces a Short-Run Tradeoff between Inflation & Unemployment.

By reducing inflation is often thought to cause a temporary This simply means that, over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.