Principles of Economics, Essay Example

According to BusinessDictionary.com (2012), economics is described as a collection of principles that deals with the market process and how it works. These principles explain economic factors such as wealth creation and distribution to various communities, resource allocation and the dynamics of human wants and needs. Economic principles are a “statement of inter-relationships among economic factors that explains what may cause what or what may happen under certain circumstances” (BusinessDictionary.com, 2012). Other definitions of economics are “the study of how people choose to use resources” and “includes the study of labor, land, and investments, of money, income, and production, and of taxes and government expenditures” (American Economic Association, 2012).

These definitions make it clear that economics is about people making choices on how to spend their money and how much of their money to save. Economics also includes how people allocate resources like their available time and creative abilities. Resources to consider also include materials such as real estate (land and buildings), equipment and tools.

People have to decide how to use resources and incorporate that into how to manage daily life activities such as working, educating and taking time out for recreation. These are all economic choices.

Some examples of economic choices are budgeting for groceries or gas and deciding on how much to spend, deciding whether or not to go to a movie, making plans on what mode of travel to take for a vacation, choosing who to vote for, making a decision on getting married or deciding on a career path. These types of choices that people make everyday are what affect and shape the economy.  The economy is also affected by the satisfaction that people gain from the products or services they buy, the time they spend on their jobs, in school, in church or on vacation. People use resources to help themselves in some way. The American Economic Association (2012) reports that people use resources to enhance their own well-being and that Economists study this in an effort to learn about and evaluate the well-being of the poor versus that of the rich. This means that individual behavior patterns are essential to the study of economics. However, the behavior of businesses, industries and governments is equally important to the study of economics and its principles. N. Gregory Mankiw, author if Principles of Economics, outlines ten principles that pertain to the subject. These ten principles deal with people making decisions, the economy as a whole, and people interactions.

Ten Principles of Economics

Economic principles are basically made up of certain central ideas and include the many facets that make up economics. The following ten economic principles are outlined by Mankiw (2011).

People Making Decisions

1. People Deal With Tradeoffs. This means that people must give up something to get something. In order to make decisions, one must consider trading what he has for something he wants. For example, if someone wants a flat screen television, then he must give up some of the money he possesses to get it. It’s a tradeoff.
2. What does something cost? It costs whatever a person gives up to get it. This means that things don’t always just cost money. There is more than monetary value put on obtaining a thing. Making decisions on cost means considering relative costs as well as monetary cost.
3. People think at the margin, when they’re rational. This implies that people that make rational decisions will take action if they can benefit from decisions marginally. This means that they will make an affirmative decision based on whether or not the benefit of making the decision outweighs what they perceive as the marginal cost.
4. Incentives make people respond. Basically, this means that people’s behavior toward a certain thing, product or service will reflect whatever benefits or perks they can get from it, such as something being on sale.

The Economy as a Whole

5. Everyone could be better off with trade. Trading allows people to do what they do best. Different people specialize in different things. Trading allows people to buy higher quality goods and services and in more variety.
6. Markets are good to organize economic activity. This is referred to as the “invisible hand” by Mankiw (2011), and it illustrates how the interaction of household and firms, with market economies, lead to efficient allocation of resources.
7. Market outcomes are sometimes improved by the government. Public policy can change the direction of the market failing to allocate resources efficiently. For example, the government can impose regulations to stir interests and efforts such as initiatives against air pollution.

People Interactions

8. Standard of living is dependent on a country’s ability to produce goods and services. This is why some countries are wealthier than others. Countries that have a high level of productivity have a higher standard of living, because the country has a higher average income.
9. When the government prints too much money, then prices increase. The value of money goes down when too much of it is created. This causes the prices of goods and services to go up. People react to this by not spending as much.
10. There is a short-run tradeoff between inflation and unemployment. This means that society is affected by the reduction of inflation through a temporary rise in unemployment. This is a tradeoff that explains the effects of governmental changes like spending and taxes.

These ten principles outline the basic premise of economics and how it affects society on individual and business/industry levels.

Conclusion

On a larger scale, how economics works is seen with the current economy. For example taxes taken, in large part, from income earnings and the national debt are still in a high state. These things often bring up the argument about whether or not the government should get bigger. According to Keller (1950), this would be a serious mistake. Keller (1950) also touches on the fact that advances were made because the economy operated on a principle of providing more and better goods and services at lower prices and by furnishing better tools of production, which increased business investment. This is still true today, more than 50 years later, as outlined in Mankiw’s ten principles of economics. It just goes to show that these principles are consistent and do not change much over time.

References

American Economic Association. (2012). What Is Economics? Retrieved from http://www.aeaweb.org/students/WhatIsEconomics.php

Economics (n.d.). BusinessDictionary.com. Retrieved from http://www.businessdictionary.com/definition/economics.html#ixzz29S3uCBWk

Economic Principle (n.d.). BusinessDictionary.com. Retrieved from http://www.businessdictionary.com/definition/economic-principle.html#ixzz29S3T6FwW

Keller, E. A. (1950). Economic Principles Underlying National Income: ‘WAGES, PRICES, PROFITS, SOCIAL SECURITY AND PENSIONS’. Vital Speeches of the Day, 16(10), 305.

Mankiw, N.G. (2011). Principles of Economics. South-Western College Pub; 6th ed.