PRINCIPLES OF ECONOMICS 1
According toGottheil (2013), every society has limited resourcesthat cannot produce enough goods and services for everyone.Therefore, it is imperative to understand how to manage the scarcelyavailable resources so as to serve the needs of the enormouspopulation. Economics is a field that deals with the management ofthe limited resources in the society. Moreover, economists mustunderstand how decisions are made, how people interact, and thevaluables that affect the economy. This paper will discuss thelessons learned from Mankiw’s ten principles of economics.
How do people make decisions? In economics, there is nothing forfree people face trade-offs. This is the first principle ofeconomics. This means that to acquire one thing one must be willingto give up something as well. For instance, students that mismanagetheir time always "pay" by failing the exams while thosethat manage time well are "paid" by passing exams. Thesecond principle of economics holds that you give up the cost ofsomething so as to get it. Good economists, therefore, make decisionsby weighing what they are getting from the deal compared from whatthey have to give. Poor economists spend more of their goods andservices for less. The third principle however closely relates to thesecond: rational people think at the margin. A rational decisionmaker (a good economist) makes a decision to take a certain course ofaction only if the marginal benefits exceed the marginal cost.According to this principle, it is imprudent to take an action if thebenefits do not outweigh the costs involved. Otherwise, it would goagainst the main goal of economics. The economic benefits andviability of any venture have to be evaluated and determined. Thefourth principle states that people respond to incentives, somethingthat motivates and encourages them. People`s behavior changesimmediately the benefits or costs change. Incentives can, however,motivate or demotivate people (Gottheil,2013). Therefore, it is vital to understand the outcome of any shiftin incentives before implementing them.
It is essential to understand how people interact and relate with oneanother. This is elaborated by the fifth, sixth and the seventhprinciples. These principles demonstrate that trade can make everyperson/party better markets are usually an effective way to organizeeconomic activity and thirdly, the government can sometimes improvethe market outcomes. For instance, every person benefits throughtrade by acquiring goods and services that they need from others.Trade is two-way traffic, an exchange of goods and services. Anexample is how friendly countries trade with each other and as aresult, each country gets whatever they need at the cost of what theyhave in plenty. On the other hand, markets are considered among thebest ways to organize economic activity. A market economy is aneconomy that distributes its resources through decentralizeddecisions made by households and firms while interacting with goodsand services. The invisible market forces determine the efficientallocation of resources. The opposite is an economy organized by acentral body (Gottheil,2013). Lastly, in this category, economists understandthat governments can improve the market`s outcomes. A market failureoccurs when a market fails to distribute resources efficiently. Whenresources are not allocated efficiently, the market fails, and onlythe government can intervene through public policy. However, thegovernment should only interpose to promote efficiency and equity.One way that the government does this is by setting price controlsand restricting exports and imports of certain products.
Also, it`s important to understand the forces that determine theworkability of the economy as a whole. Here, the living standards aredependent on the country`s ability to produce goods and services (theeighth principle of economics). Countries that produce more andbetter goods and services obviously enjoy high living standards.Similarly, a nation`s average income grows with productivity. Theninth principle states that the price of goods and services risewhenever too much money is printed. With a lot of money incirculation, the value of the currency decrease. This makes itimperative to use more money to pay for the same products than beforethe printing of excess currency notes. This results in inflation andmany countries have been victims of the same, the most notable one inthe recent past being Zimbabwe. Zimbabwe`s hyperinflation forced thecountry to completely switch to the US Dollar as a medium of trade.The tenth principle of economics holds that society experiencesshort-run tradeoff between unemployment and inflation. Minimizinginflation often results in a temporary rise in unemployment. However,it is important to understand the short-run impacts of changes ingovernment spending, taxes, and, monetary policy (Gottheil,2013).
Every society enjoys an abundance of certain resources that arescarce for another. To manage the scarce resources, societies tradethe abundant resources for the scarce ones. This way, nations benefitfrom the economic interdependence. For instance, a country likeChina that has plenty of cotton can trade with another country thathas plenty of oil (oil is scarce in China). Similarly, Germany, whichhas plenty of machinery, trades with Kenya, which has plenty of teaand scarce machinery. The cheaper the services or goods, the morepeople will want to buy them. Economic equilibrium is a situationwhereby all the economic forces are balanced in the absence ofexternal forces. It happens when supply equals demand. Economicequilibrium determines how supply relates to demand and is maintainedby lowering or raising prices in response to demand and supplychanges. Price controls are enforced by the government to restrictthe prices of goods and services. They are set to protect theconsumers especially in events of high demand and low supply ofcommodities. Taxes, on the other hand, are imposed to generaterevenue and are either paid by the supplier or the customer. This isdetermined by considering the elasticity of the demand and supplycurve. The more inelastic the curve is, the more the tax paid.
Gottheil,F. M. (2013). Principlesof economics.Mason, OH: South-Western Cengage Learning.