PRINCIPLES OF ECONOMICS:

1)People face trade-offs: Due to scarcity of resources one needs to pay

opportunity cost to get something one wants, i.e. everything has a price.
To get something one wants one needs to give up something.
Example, you might take a day off work to go to a concert, gaining the
opportunity of seeing your favorite band, while losing a day's wages as
the cost for that opportunity.

2)The cost of something is what You give up to get it: This is also called
Opportunity Cost.
 Making decisions requires comparing the cost and benefits of alternate
products or services.
 The opportunity cost of an item is what you give up to get that item.

Example: when making a decision like going to college one is giving up

money needed for fees, hostel charges, living expenses, miscellaneous
costs, etc, and the most important resource, i.e. one’s time. The same
time could have been utilized in doing a job, gaining job experience or
exposure to the industry. College athletes can earn millions if they drop
out of school and play professionally. They are aware that the
opportunity cost of college is very high. And so it often they decide that
its benefits is not worth the cost.

3)Rational People think at the Margin: Rational people often make

decisions by comparing marginal benefits and marginal costs.
 Thinking at the margin works for better economic decisions.
 They look for marginal benefits to describe a small incremental
adjustment to an existing budget or available resource.
 A person’s willingness to pay for a good is based on the marginal benefit
that an extra unit of the good would yield.
 The marginal benefit, in turn, depends on how many units a person
already has. Rational people take an action if and only if the marginal
benefit of the action exceeds the marginal cost.
 Example: Say you have a banana farm. You want to know whether you
should work more to produce more bananas. You might have already
invested a lot in making your farm more efficient, meaning that extra
resources won’t do as much to improve productivity. This is because, in
this case, there are diminishing marginal returns to investment, though
you can also have increasing returns, like through economies of scale,
advantages of being large in scale.

4)People respond to Incentives: Incentives induce people to act.

 If you use a rational approach to decision making that involves trade-offs
and comparing costs and benefits, you respond to incentives.
 Role of Incentives in Public Policy-Making: Many policies change the
costs or benefits that people face and, as a result, alter their behavior. A
tax on gasoline, for instance, will encourage people to drive smaller,
more fuel-efficient cars.
Example: when the price of an apple rises, people decide to eat fewer
apples. At the same time, apple orchards decide to hire more workers
and harvest more apples. In other words, a higher price in a market
provides an incentive for buyers to consume less and an incentive for
sellers to produce more. The influence of prices on the behavior of
consumers and producers is crucial for how a market economy allocates
scarce resources.

5)Trade can make everyone better off: It is one of the key concepts of
Globalization.
 Trade allows each person to specialize at what he or she does best. In
the same way, nations can specialize in what they can manufacture or
provide best. In both cases, people get a wider range of choices at lower
prices.
 There is no problem with trans-border trade, as long as it benefits the
people at large in both the producer and consumer jurisdictions.

6)Markets are usually a good way to Organize Economic activities: The

need for improvement or development of a particular sector or section
of the industry or economy will lead the market to function thus.
 Any profitable change in the market or its working will usually drive itself
if the market has to be sustainably progressed.
 Even though individuals and firms are all acting in their own self-interest,
prices and the marketplace guide them to do what is good for society as
a whole or needed for its proper functioning.
 The interaction of buyers and sellers determines prices. Each price
reflects the good’s value to buyers and the cost of producing the good.
Prices guide self-interested households and firms to make decisions that,
in many cases, maximize society’s economic well-being.

7)Governments can sometimes Improve Market outcomes: We need

government because the market and trade can work their magic only if
the government enforces the rules and maintains the institutions that
are key to a market economy.
 Most important, market economies need institutions to enforce
property rights so individuals can own and control scarce resources.
 A farmer won’t grow food if he expects his crop to be stolen;
 A restaurant won’t serve meals unless it is assured that customers will
pay before they leave, and
 An entertainment company won’t produce DVDs if too many potential
customers avoid paying by making illegal copies.
 Market failure: when the market fails to allocate society’s resources
efficiently
 Causes of Market failure: Externalities, when the production or
consumption of a good affects bystanders (e.g. pollution),
 : Market power: a single buyer or seller has substantial influence on
market price (e.g. monopoly).
Example: India’s decision to withdraw from the RCEP agreement, one of
the reasons for this decision was the threat of New Zealand dairy
product flooding Indian markets and harming poor Indian milk
producers.

8)A country’s standard of living depends on its ability to produce goods

and services: The differences in living standards around the world are
staggering.
 An average American has an income of about $47,000. The average
Mexican earns about $10,000 annually, and the average Nigerian earns
only $1,400.
 This large variation in average income is reflected in various measures of
the quality of life. Citizens of high-income countries have more TV sets,
more cars, better nutrition, better healthcare, and a longer life
expectancy than citizens of low-income countries.
 Almost all variation in living standards is attributable to differences in
countries’ productivity—that is, the amount of goods and services
produced from each unit of labor input.
 In nations where workers can produce a large quantity of goods and
services per unit of time, most people enjoy a high standard of living; in
nations where workers are less productive, most people endure a more
meager existence.
 Similarly, the growth rate of a nation’s productivity determines the
growth rate of its average income.
 To boost living standards, policymakers need to raise productivity by
ensuring that workers are well educated, have the tools needed to
produce goods and services, and have access to the best available
technology.

9)Prices rise when the government prints too much money: If a country
prints more money without making more things, then prices just go up.
 As the printing presses sped up, prices rose faster, until these countries
started to suffer from something called “hyperinflation”. That’s when
prices rise by an amazing amount in a year.
 When Zimbabwe was hit by hyperinflation, in 2008, prices rose as much
as 231,000,000% in a single year. Imagine, a sweet which cost one
Zimbabwe dollar before the inflation would have cost 231m
Zimbabwean dollars a year later.
 This amount of paper would probably be worth more than the
banknotes printed on it.
 To get richer, a country has to make and sell more things – whether
goods or services. This makes it safe to print more money, so that
people can buy those extra things.
 10)Society faces a short-run Trade-off between Inflation and
Unemployment: The greater the aggregate demand for goods and
services, the greater is the economy’s output, and the higher is the
overall price level.
 A higher level of output results in a lower level of unemployment.
 The “natural” rate of unemployment is the rate to which the economy
gravitates in the long run.
 The natural rate is not necessarily desirable, nor is it constant over time.
 Monetary policy cannot change the natural rate, but other government
policies that strengthen labor markets can.
 Expected inflation measures how much people expect the overall price
level to change.
 In the long run, expected inflation adjusts to changes in actual inflation.
 Once people anticipate inflation, the only way to get unemployment
below the natural rate is for actual inflation to be above the anticipated
rate.
 Major adverse changes in aggregate supply can worsen the short-run
trade-off between unemployment and inflation.
 An adverse supply shock gives policymakers a less favorable trade-off
between inflation and unemployment. A supply shock is an event that
directly alters the firms’ costs, and, as a result, the prices they charge.