Entrepreneurship

10 Principles Of Economics

10 Principles of Economics-Economics plays a very important role in our everyday life from what we choose to buy, how we budget and why we end up coming up with our buying decision.

The knowledge of economics is important to an individual and also the society at large.

Economics is the study of how to use the available resources in the best possible way as these resources are limited in supply. Economics has been defined in many ways by a lot of economics based on their perceived interpretation of Economics and all these definitions points at effective use of limited resources whether at an individual or societal level.

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Economics has also been seen as a social science as it studies human behaviour and how they come up with decisions they make in order to use their resources effectively.

The study of economics came as a result of scarcity and the inability of humans to meet all their needs and wants.

In Economics you will always be told that human wants are unlimited or insatiable and this is because the resources available to satisfy these wants are not in abundance.

In this write up, we will be looking at the 10 principles of economics Mr. N. Gregory Manki and how you can apply it to your everyday life.

But before that, we will be looking at the definitions of Economics by some economists.

So without much hesitation, let’s get started…

What Is Economics?

Like we mentioned earlier that a lot of economists came up with different definitions for economics and we will be looking at these definitions briefly.

Adam Smith “The Father of Economics” in his treatise “Wealth of Nations” defined economics as “an inquiry into the nature and causes of wealth of nations.”

Alfred Marshal saw Economics as “the study of mankind in the ordinary business of life.”

John Stuart Mills defined Economics as “the practical science of production and distribution of wealth.”

H.J Davenport defined Economics as “the science that treats phenomena from the standpoint of price.”

All these authors gave a clear definition of Economics but there is a more acceptable definition of Economics by Lord (Professor) Lionel C. Robbins. He defined Economics as “a social science that studies human behavior as a relationship between ends and scare means which have alternative uses.”

This definition looks at the fundamental human problems in the society like wants (ends), scarcity and choice.

10 Principles of Economics

We will be looking at the 10 principles of economics by Mr. N. Gregory Mankiw in his book “Principles of Economics”. We will be throwing more light on these principles and how they come into play in our everyday life.

The Cost Of An Item Is What We Left To Get That Item

This principle looks at “opportunity cost” and it is saying that for everything we get, there is a sacrifice we have to make to get it. The cost of getting an item is not actually the price of the item but it is the sacrifice we had to make to get that item.

Let’s take this for instance, if you had to choose between getting a cutlass and a hoe and you decided to get the cutlass instead of the hoe, the hoe here is the sacrifice you had to make to get the cutlass. It is alternative that you had to forgo to get the cutlass.

In making rational choices in life, it is important that you weigh the opportunity cost to according to how pressing your needs are and know which one you should meet first based on your available resources as this will help you make rational decisions and use your resources efficiently.

People Face Trade-Offs

One thing you should always put in mind is that nothing comes for free. Like we explained with the opportunity cost that you will have to forgo something to get something.

For you to make decisions, you will have to trade off one goal for the other. It is impossible to get everything you want as there is no point in life where your resources are in abundance to satisfy all your wants as human wants are insatiable.

You just have to trade-off something for another. That is why it is important that you have a scale of preference if you really want to make rational decisions. This scale of preference is a table that helps you arrange your needs or wants according to how pressing they are.

When you arrange your needs according to how pressing they are, you will be able to make rational decisions to meet your needs one after the other and also get maximum satisfaction in the end.

People Respond To Incentives

Incentives are more like rewards for anything we do and this getting incentives acts like a boost to do more. It is how humans function.

In a work place, the employers offers incentives to employees that would work extra hours and this is a way to encourage the workers to do more.

Incentives will inspire consumers to act by offering up a reward to those people who are willing to change their behavior.  Incentives makes the consumers choose a particular product over another and as a manufacturer or seller, it is a good way to fight competition and gain consumer loyalty.

Rational People Want To Maximize Satisfaction

The aim of consuming or making use of a product is to maximize satisfaction. With this in mind, people are driven to make rational decisions even with the limited resources.

This brings us down to marginal cost and marginal benefits or satisfaction. You will have to weigh the marginal cost of any decision you want to make against the marginal benefit and a rational person will also make a decision when the marginal satisfaction outweighs the marginal cost.

Consumers will continue to consume a product as long as its marginal utility is more than its marginal cost.

Marginal changes have to do with the incremental adjustment to what you normal do. If you do study for 7 hours a day, what is the marginal benefit and marginal cost of studying for 10 hours a day. In as much as you would get to study more and cover more topics which is the marginal benefit, you would also leave some things undone which is the marginal cost of the decision you want to make.

You make rational decisions when the marginal benefit of the action you take is more than the marginal cost.

Markets Are Usually A Good Way To Organize Economic Activity

For any economy to do well, there must be free and fair markets. For there to be a perfect market situation, the forces of demand and supply should determine the price in the market and not producers, buyers or government.

History has shown that the intervention of government in deciding the quantity of goods to the supplied to the market and also the price of the goods will greatly affect the market in the long run.

So it is very important to understand the consumer demand pattern, consumers’ taste and preference, their ability and willingness to pay and also the cost of production as all these play a role in the pricing and availability of goods in the market.

The best form of market is the free market economy as millions of firms and households have the upper hand in making decision on what, how, where, for whom and how much to produce and sell at the best price.

Trade Makes Everyone Better Off

In a society, trade is very important for the well-being of people in the society. The thing is we cannot produce everything we need and so we will have to specialize in what we have a comparative cost advantage in producing and exchange it with what we have a comparative cost disadvantage.

Making rational decisions will help you make the right choice in choosing the best alternative among a wide range of alternatives after weighing the cost advantages to see the one you can produce best at less cost.

When we specialize in the production of goods and services for which we have comparative cost advantage, it will lead to efficiency in production and mutual benefits of trade.

This is applicable to firms, governments and also countries of the world.

Government Has The Resources To Improve The Outcomes Of The Market

Government plays a huge role in controlling the market forces as they ensure that the market participants follow the rules and regulations governing the market.

They encourage people to produce and sell and also participate in economic activities without any fear of being cheated or incurring any loss.

The market will only work if certain enforcements and laws are made to regulate the activities of manufacturers, sellers and buyers.

The intervention of the government in the market is to promote efficiency and equity. The government tries to leverage the power of sellers and buyers in the market so that they cannot influence market actions.

The Standard Of Living Of A Country Depends On Its Ability To Produce Goods And Services

All the countries of the world have different standards of living and this is because of the difference in the productivity levels of the countries of the world.

A country with high level of productivity will surely experience a high standard of living as there will industrialization which will lead to more employment opportunities and when people work, they tend to make more to meet their needs and enjoy the good things of life.

On the other hand, a country with low level of productivity will experience low standard of living as a result of lack of industries which will lead to low level of employment, inflation, lack of infrastructures and inability of people to earn money to meet their needs.

The Uncontrolled Printing Of Money By The Government Would Result In Rise In Price

This has a lot to do with the purchasing power of money and inflation.

When there is too much money in circulation as a result of excessive printing of money by the government chasing fewer goods, it will lead to increase in demand which will lead to increase in the prices of goods and services.

Too much money in circulation will result in money losing its value and with the reduction in the purchasing power of that country’s currency; more and more money will be required to buy the same amount of goods and services.

The government will have to come up with policies to help control the circulation of money in the country so as to prevent the depreciation of the value of money in the country.

Trade-Off Between Employment And Inflation

Every country experiences a short-term trade-off between inflation and unemployment. When there is excess supply of money, it will lead to too much money in circulation chasing fewer goods as there will be high demand which will lead to inflation.

When there is high demand as a result of everybody holding money, producers will be forced to produce and supply more goods and for them to supply more goods, they will have to hire more workers making the unemployment level in the country to drop.

Final Note

Economics is very important in our everyday life as the knowledge will help you make rational decisions. Economics is for everybody as it is not limited to a particular field of study or career.

With what we have discussed in this article, you now have a taste of what economics is all about and how you can apply the 10 principles of economics in your everyday life and make rational decisions.

REFERENCE

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