TEN ECONOMIC PRINCIPLES
ECONOMIC PRINCIPLE
People Face Tradeoffs
The Cost of Something is What You
Give Up to Get It
Rational People Think at the Margin
People Respond to Incentives
Trade Can Make Everyone Better Off
Markets Are Usually a Good Way to
Organize Economic Activity
Governments Can Sometimes Improve
Economic Outcomes
The Standard of Living Depends on a
Country's Production
Prices Rise When the Government
Prints Too Much Money
Society Faces a Short-Run Tradeoff
Between Inflation and Unemployment
Saint Paul School of Professional Studies (formerly Saint Paul School of Business and Law)
Campetic Road, Palo, 6501 Leyte, Philippines • Telephone +63 53 323 7778 • Fax +63 53 323 4402 • www.spsps.edu.ph
IMPLICATION
To get one thing, we usually must give up
something else
Opportunity cost is the second best alternative
foregone
Marginal changes are small, incremental
changes to an existing plan of action
Incentive is something that causes a person to
act. Because people use cost and benefit
analysis, they also respond to incentives
Trade allows countries to specialize according
to their comparative advantages and to enjoy a
greater variety of goods and services.
Adam Smith saw that when households and
firms interact in markets guided by the invisible
hand, they will produce the most surpluses for
the economy.
Market failures occur when the market fails to
allocate resources efficiently. Governments can
step in and intervene to promote efficiency and
equity.
The more goods and services produced in a
country, the higher the standard of living. As
people consume a larger quantity of goods and
services, their standard of living will increase.
When too much money is floating in the
economy, there will be higher demand for
goods and services. This will cause firms to
increase their price in the long run causing
inflation.
In the short run, when prices increase,
suppliers will want to increase their production
of goods and services. To achieve this, they
need to hire more workers to produce those
goods and services. More hiring means lower
unemployment while there is still inflation.
EXAMPLE
Leisure time vs. work
The opportunity cost of going to college
is the money you could have earned if
you used that time to work.
Deciding to produce one more pencil or
not
Higher taxes on cigarettes to prevent
smoking
Buying Managerial Economics book from
a person who aims to profit from the
book they sold.
Giving people the right and autonomy to
establish small, medium, and big
businesses to create wealth.
Government can give money for
individuals for sustenance and for
businesses for restructuring.
More human, and natural resources the
country has more prosperous the
country will be.
Inflation/Hyperinflation.
Giving jobs to people in exchange of
income while inflation is going.
Rationale of Ten Economic Principles:

Purpose:
Gregory Mankiw's basic principles of economics help to provide an explanation and framework
for how a broad spectrum of markets and economies work and interact with one another based
on simple universal concepts that have a foundation based on the fundamental economic
problem of scarcity.

Flaws:
1. The Principle of Scarcity: This principle states that resources are limited, and so are the
goods and services that can be produced from those resources. This means that there will
always be a demand for goods and services that cannot be met due to the limited resources
available.

2. The Principle of Supply and Demand: This principle states that the price of goods and
services are determined by the forces of supply and demand in the market. If demand is high
and supply is low, then prices will rise; if demand is low and supply is high, then prices will fall.

3. The Principle of Opportunity Cost: This principle states that when planning, one must
consider the cost of taking one option over another. The cost of the option not chosen is
referred to as the opportunity cost.

4. The Principle of Marginal Utility: This principle states that the satisfaction derived from the
consumption of an additional unit of a good or service declines as the number of units
consumed increases.

5. The Principle of Diminishing Marginal Returns: This principle states that as more units of a
variable factor of production are used with a fixed amount of other productive inputs, the
marginal returns from the extra unit of the variable factor will eventually diminish

Saint Paul School of Professional Studies (formerly Saint Paul School of Business and Law)
Campetic Road, Palo, 6501 Leyte, Philippines • Telephone +63 53 323 7778 • Fax +63 53 323 4402 • www.spsps.edu.ph