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The 10 key principles of economics (4- PEOPLE RESPOND TO INCENTIVES…
The 10 key principles of economics
1- PEOPLE FACE TRADE OFFS
A trade off is when one thing has to be given up to gain another
For example, society faces one between efficiency and equity
2- THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT
Opportunity cost is the value of benefits given up in order to obtain an item
The cost of making one decision over another
3- RATIONAL PEOPLE THINK AT THE MARGIN
Marginal decisions is the comparison of making slight incremental changes
This means that marginal costs and benefits can be compared
4- PEOPLE RESPOND TO INCENTIVES
Incentives are anything that rewards people for acting in a certain way
This is as people exploit opportunities to gain rewards for selfish gain
This means that policymakers should always consider what they're incentivising people to do e.g. concerning taxation
5- TRADE CAN MAKE EVERYBODY BETTER OFF
If a country isolated itself and tried to become self-sufficient (autarky), it would have to produce everything itself despite comparative disadvantages e.g. trying to grow food in an unsitable climate
Trade allows each economic agent to specialise in what they produce best
Allows for a greater variety of goods and services to be produced, at a lower cost due to efficiency
6- MARKETS ARE A GOOD WAY TO ORGANISE ECONOMIC ACTIVITY
Command economies (communist) have failed in the past
Market economies have been shown to be vastly successful
Market economies are when decisions on what is produced and consumed are made by individual firms and companies
7- GOVERNMENTS CAN IMPROVE MARKET OUTCOMES
Government policies and structures such as police and courts enforce property/rights laws
Government intervention to promote efficiency or equity
Market economy rewards people on their ability to produce things that others wish to buy
8- STANDARD OF LIVING DEPENDS ON PRODUCTION ABILITY
Standard of living is the amount of goods/services that a population can purchase, typically measured by real income per head
Variation in living standards is typically attributable to productivity levels
9- PRICES RISE WHEN GOVTS PRINT TOO MUCH MONEY
Inflation is an increase in overall prices in an economy
Inflation typically occurs when more money is printed as therefore it has less value per unit
10- THERE IS A TRADE OFF BETWEEN INFLATION AND UNEMPLOYMENT
Increasing the amount of money in an economy also decreases unemployment
Means the government can change tax/printed money/spending to control inflation and unemployment