10 ECONOMICS PRINCIPLE
The word economy comes from the Greek word oikonomos, which means “one who manages a
household.” At first, this origin might seem peculiar. But in fact, households and economies have
much in common. Economics is the study of how society manages its scarce resources.
Economists therefore study how people make decisions: how much they work, what they buy,
how much they save, and how they invest their savings. Economists also study how people
interact with one another. For instance, they examine how the multitude of buyers and sellers of
a good together determine the price at which the good is sold and the quantity that is sold.
Finally, economists analyze forces and trends that affect the economy as a whole, including the
growth in average income, the fraction of the population that cannot find work, and the rate at
which prices are rising.
HOW PEOPLE MAKE DECISIONS.
Because the behavior of an economy reflects the behavior of the individuals who make up the
economy, we begin our study of economics with four principles of individual decision making.
Principle 1: People Face Trade-offs
You may have heard the old saying, “There ain’t no such thing as a free lunch.” To get one thing
that we like, we usually have to give up another thing that we like. Making decisions requires
trading off one goal against another.
Example, the phrase “Gun and Butter” reffering to the economic policies of a government or
society, considered in light of the percentage of resources allocated to military uses as opposed
to the percentage allocated to other, nonmilitary spending, as for social welfare.
Principles 2: The Cost of Something Is What You Give Up to Get It
Because people face trade-offs, making decisions requires comparing the costs and benefits of
alternative courses of action. It also can be called as opportunity cost, The opportunity cost of an
item is what you give up to get that item. When making any decision, decision makers should be
aware of the opportunity costs that accompany each possible action.
Example, Consider the decision to go to college. The main benefits are intellectual enrichment
and a lifetime of better job opportunities. But what are the costs? To answer this question, you
might be tempted to add up the money you spend on tuition, books, room, and board. Yet this
total does not truly represent what you give up to spend a year in college. There are two problems
Principles 3: Rational People Think at the Margin
Economists normally assume that people are rational. Rational people systematically and
purposefully do the best they can to achieve their objectives, given the available opportunities.
Example, As a businessman, Mr. Wahyu has quite a lot of savings in banks. The savings are the
result of Pak Wahyu's hard work from the start of the company. Pak Wahyu's company is a
company that prioritizes profit. Pak Wahyu often gets quite a large profit. One day, Mr. Wahyu
was faced with two choices, buy a new production machine to increase company productivity, or
using his savings to enjoy a vacation with his family and meet the daily needs of his family. Mr.
Wahyu prefers to sacrifice his savings to buy a new machine, in order to boost the productivity
of the company so that it gets higher profits.
Principle 4: People Respond to Incentives
An incentive is something that induces a person to act, such as the prospect of a punishment or
a reward. Because rational people make decisions by comparing costs and benefits, they respond
to incentives.
Example, When the price of beef goes up, most people will tend to prefer chicken meat to buy,
because the price is cheaper. At the same time, the beef seller will sell more beef than usual
because he knows that he will get a higher profit. The action carried out by the beef seller in 10
economic principles according to Mankiw is called an incentive because he might get a lot of
profit or even loss.
HOW PEOPLE INTERACT.
The first four principles discussed how individuals make decisions. As we go about our lives, many
of our decisions affect not only ourselves but other people as well. The next three principles
concern how people interact with one another.
Principle 5: Trade Can Make Everyone Better Off
You may have heard on the news that the Japanese are our competitors in the world economy.
In some ways, this is true because American and Japanese firms produce many of the same
goods. Ford and Toyota compete for the same customers in the market for automobiles. Apple
and Sony compete for the same customers in the market for digital music players.
Example, Mankiw says He says that that my family competes with other families for jobs, and
when we shop, we compete with others to find the best prices. But if we cut ourselves off from
the market, we would have to grow our own food, make our own clothes, and build our own
houses. “Trade allows each person to specialize at what he or she does best, whether it’s farming,
sewing, or home building.” In the same way, nations can specialize in what they do best.
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Mankiw says that in a market economy, the decisions of a central planner are replaced by
decisions of millions of market participants. Firms decide what and how much to make, and
households decide where to work and what to buy. It is wonderful how this system is so
successful at “organizing economic activity to promote overall economic well-being.” The magic
is prices.
Example, For example there is a company engaged in the field of technology that wants to
innovate their products. To determine the form of innovation that the company wants to work
on, the company must pay attention to the UX (User Experience) before conducting
development. This is what is called the "market is a good activity in organizing economic
activities" in the 10 economic principles of Mankiw.
Principle 7: Governments Can Sometimes Improve Market Outcomes
If the invisible hand of the market is so great, why do we need government? One
purpose of studying economics is to refine your view about the proper role and
scope of government policy.
Example, we can see today is in the case of the economy as it is today, where many companies
went bankrupt and market failures occurred. The government can intervene to save the company
from bankruptcy, and maintain smooth production while minimizing unemployment by buying
out, or buying / taking over a company by the government.
HOW THE ECONOMY AS A WHOLE WORKS.
We started by discussing how individuals make decisions and then looked at how people interact
with one another. All these decisions and interactions together make up “the economy.” The last
three principles concern the workings of the economy as a whole.
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
The living standard in the country is depends upon the country producing capacity. In country
where, more goods and service are produced in a unit time there standard of living is high as
compared to the people with less productivity.
Example, Living standard of a U.S. citizen is better than living standard of Mexican and Nigerian
citizen as a U.S. citizen earn more than those two citizen.
Principle 9: Prices Rise When the Government Prints Too Much Money
Inflation is the state in which the price level increases in the economy. Inflation occurs when the
supply of the money, which is under the hood of government, increased drastically in compare
to the accessibility of services and goods in the markets.
Example, as in Germany in the early 20s, where the price of goods tripled every month, the
amount of money recorded increased 3 times each month.
Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
Reducing inflation often causes a temporary rise in unemployment. This tradeoff is the key to
understanding the short-run effects of changes in taxes, government spending and monetary
policy.
Example, The Phillips curve is an economic concept developed by A. W. Phillips stating that
inflation and unemployment have a stable and inverse relationship. The theory claims that with
economic growth comes inflation, which in turn should lead to more jobs and less
unemployment.