Economics Principles Paper Example

Introduction

Economics is defined as the study of how society manages its scarce resources. Economists study how the society make decisions, how they buy, work, save and make investments. They analyses demand and supply, monitor buyers and sellers to determine the prices of goods and services and also analyze trends and forces that affect the economy (Mankiw, Croushore & Stull, 2009). In relation to this, principles of economics are the basic concepts and methods economist relate when doing economic analysis. This paper seeks to examine and converse on the ten principles of economics.

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Principle 1: People Face Tradeoffs (Mankiw, 2003)

This entails decision making where one has to sacrifice an item thing to get another. For instance, a country spends its resources for its defense but also will sacrifice its spending for its own welfare. The difference high level of income and clean environment is another form of tradeoff. This is where the state laws require firms to reduce pollution as a way of conserving the environment which in turn reduces income costs of customers, employees, and firm owners (Mankiw, 2003). Another tradeoff is efficiency and equality. Efficiency is the maximum utilization of scarce resources and equality is the equal distribution of this resources in the society (Mankiw, 2003).

Principle 2: The Cost of Something Is What You Give Up To Get It (Mankiw, 2003)

Decisions made as a result of tradeoffs requires one to compare costs and benefits but at times the cost will not be obvious as it appears. An example of this is giving up a job to attend college and get a postgraduate degree. This means that the student has sacrificed employment to study post graduate (Mankiw, 2003). Giving up an item to get the other is called opportunity cost. In this case, opportunity cost should drive our decisions.

Principle 3: Rational People Think at the Margin (Mankiw, 2003)

To achieve maximum benefits people are driven to make small decisions on their plan of action. These small increment adjustments are referred to as marginal changes. For instance, a fisherman will opt to spend more time fishing to increase the catch. To make this decision, the fisherman has to be aware of the extra cost he will incur and additional benefits. The comparison between marginal cost and marginal benefits is very important in decision making (Mankiw, Croushore & Stull, 2009).

Principle 4: People Respond to Incentives (Mankiw, 2003)

Since individuals make decisions based on costs and benefits, their demeanor and behavior changes when there is a change in either costs or benefits. If the price of an apple fruit increases, then the customer will opt for other fruits because of change in price. The incentive is used in evaluating how the market works and thus when making policies direct and indirect effects must be considered (Mankiw, 2003).

Principle 5: Trade Can Make Everyone Better off (Mankiw, 2003)

Trade takes place not between individuals but based on what they own. For instance, Japan is a competitor to America because they produce many of the same goods. Trading between this countries makes each one of them better off. This makes countries not to specialize in what they can do and deliver best but also open up their markets to a wide variety of good and services that can be traded to other countries.

Principle 6: Markets Are Usually A Good Way to Organize Economic Activity (Mankiw, 2003)

Previously countries had a centrally planned economy where the decisions of a central planner were replaced by the decision of lots of households and firms. Today this is being replaced by the market economy which allows recourses through decentralization. Household and firms communicate with each other through markets taking place under the influence of self-interest and price that helps in decision making (Mankiw, 2003). An example is a government imposing taxes which always have effects on prices and the decisions of consumers and producers.

Principle 7: Governments Can Sometimes Improve Market Outcomes (Mankiw, 2003)

Market failure occurs due to failure in the distribution of resources efficiently in the market decreasing productivity. Since the government is invisible in the market, it will be pivotal if it enforces laws that support and regulate institutions that are big contributors to the market economy. For instance, the United States increased taxes on tariffs of imported goods in order to invigorate the countries manufacturing industry to increase production and create opportunities (Mankiw, Croushore & Stull, 2009).

Principle 8: A Country's Standard Of Living Depends on Its Ability to Produce Goods and Services (Mankiw, 2003)

Different countries globally have different living standards because of the productivity levels on the number of goods and services from each unit of labor. More production of goods and services per unit time means a country revel in high standards of living but when the productivity is low people undergo more distorted living standard. The relationship between living standards and productivity has a philosophical inference for public policy (Mankiw, Croushore & Stull, 2009).

Principle 9: Prices Rise When the Government Prints Too Much Money (Mankiw, 2003)

Inflation is caused by an increase in the price level in an economy. When the supply of money increases compared to the accessibility of goods and services in the market this is called inflation causing the country's currency to lose value (Mankiw, 2003).

Principle 10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment (Mankiw, 2003)

The decrease in inflation has always been alleged to cause an increase in unemployment. Philips curves explain this tradeoff between unemployment and inflation but it is a controversial subject. Even though this is the case, many economists accept the impression that there is a short run tradeoff between unemployment and inflation (Mankiw, 2003). The short-run tradeoff between unemployment and inflation needs to be exploited by economist using various instruments. It will only be achieved by changing government spending, taxes, and influence the overall demand for goods and services.

Conclusion

In conclusion, knowledge in economics comprehends marginal thinking and improves individual knowledge in making judgments on established government policies. Government policies are there improve efficiency and promote equality.

References

Mankiw, N. G., Croushore, D. D., & Stull, C. A. (2009). Principles of economics: 1. Fort Worth: Dryden Pr.

Mankiw, N. G. (2003). Principles of economics. South Western College Publications.