The Ten Principles

Before I go on with the Demand, an urgent break! There's one topic we shall learn if we actually start Economics from scratch. That is, the Ten Principles of Economics!

Economics is often seen as a daunting and confusing subject, only for those with an advanced degree or who are mathematically inclined. But in reality, economics is not some abstract and alien discipline that is removed from our daily lives! It's a fundamental part of how we make decisions and interact with the world around us. From the choices we make about what to buy and where to work, to the policies our governments enact and how we trade with other countries, economics is at the heart of it all. Every day we are confronted with trade-offs and incentives, and we are constantly making decisions based on what we believe will give us the best outcomes.

So let's start today's episode with the very basic starting concept of Economics. The ten principles of economics are often attributed to renowned economist Gregory Mankiw, an American economist who is widely known for his contributions to the field of macroeconomics, being the author of several well-known economics textbooks including "Principles of Economics," which is widely used in universities around the world. These principles were first introduced in this book, first published in 1997 and is now in its eighth edition.

Let's see what these principles are and try to understand.

Principle 1: People face trade-offs.

In order to achieve one thing, you may have to give up something else. For example, if you want to spend money on a new video game, you may have to sacrifice the money you would have spent on a movie ticket. Just not money, this is true in terms of time too.

Principle 2: The cost of something is what you give up to get it.

This principle is closely related to the first one. When you make a decision to spend money or time on something, you need to consider what you are giving up in order to get it. The time you spent in the games, if you used it in studying instead, your grades might be improved. (hahaha!) So here the cost to playing games, is your studying. Gamers please don't get offended, it's just an example!

Principle 3: Rational people think at the margin.

Rational people usually make decisions based on what will benefit them the most. When making decisions, they think about the "marginal cost" and "marginal benefit". These two have their own chapters which we will discuss in details in future. For now, suppose a shop owner has 10 waiters, now its owner is considering hiring an additional waiter, he will think about the additional cost versus the additional benefit of having an extra employee.

Principle 4: People respond to incentives.

This principle is all about motivation. People are more likely to do something if they are rewarded for it. For example, if your company offers a bonus of 10k to you for meeting a certain sales goal, as an employee you will work harder to achieve that goal. But I'll repeat again, it's not just only money. Suppose if you donate to a charity, you do it to help the poors or orphans, not for money. That is also an incentive for you behind the donation.

Principle 5: Trade can make everyone better off.

Trade allows individuals and countries to specialize in what they are good at and exchange their goods and services with others. We export clothes, labourers and raw materials in many countries, and they give us foreign currency This leads to greater efficiency and wealth for everyone involved.

Now these 5 principles we've seen so far, are on individual level, in you and me. Now the next 5 principles will be focusing on a bigger scale, like the markets and countries. Don't worry, nothing to be afraid. Let's proceed.

Principle 6: Markets are usually a good way to allocate resources.

It is believed that the free market system allows individuals and businesses to make their own decisions about what to produce, how much to produce, and at what price to sell their goods and services. This results in resources being allocated in the most efficient way possible.

Principle 7: Governments can sometimes improve economic outcomes.

While the free market system is generally the most efficient way to allocate resources, there are times when the government needs to intervene to correct market failures or provide public goods. They bring policies and laws to avoid corruptions, abuses or price manipulations etc.

Principle 8: The standard of living depends on a country's production.

The more a country produces, the more it can consume and the higher the standard of living for its citizens. This is why countries focus on economic growth and increasing their production.

Principle 9: Prices rise when the government prints too much money.

This is known as inflation. When there is too much money in circulation, prices rise and the value of the currency decreases. We will learn about it in details too.

Principle 10: Society faces a short-run trade-off between inflation and unemployment.

This principle is also known as the Phillips Curve. In the short run, increasing inflation can lead to lower unemployment rates, but in the long run, the trade-off disappears.

So those are the ten principles of economics. Understanding these principles can help us make better decisions in our personal lives and can also help us understand how the economy works on a larger scale.