"We have created you so as to judge who among you are the

best followers of our words." [Al-Mulk: 2]

 Ten Principles of Economics

Prepared by Ms Hira Mujahid

Ref Book: Principles of Microeconomics
Author: N. Gregory Mankiw
Economics
■ Origins from Greek work “oikonomos” means
who manage a household
■ As household faces many decisions like which
household members do which task and what
each member get return?
■ Who cooks? Who does drive?
■ In other word, a household must allocate its
scarce resources (time, car, etc)
■ Similarly, a society faces many decisions like it
needs someone who grow food, somebody who do
clothing and also someone who do technical work
etc.
■ Scarcity: The limited nature of society's resources
■ Economics: The study of how societies use scare
resources to produce valuable commodities and
distribution them among different people.

The study has many aspects but it is unified by

several central ideas.
Principles

■ How People Make Decisions

■ How People Interact
■ How Economy Work As Whole
Ten Principles of Economics
1. People Face trade-offs
2. The Cost of Something Is What You Give Up to Get it
3. Rational People think at the Margin
4. People respond to Incentives
5. Trade Can Make Everyone Better Off
6. Markets are Usually a Good Way to Organize Economic action .
7. Governments Can Sometimes Improve Market Outcomes
8. A Country’s Standard of Living Depends on Its ability to Produce Goods and
Services
9. Prices rise When the Government Prints too Much Money
10. Society Faces a Short-run trade-off between Inflation and Unemployment
How People make decisions

1. People Face trade-offs

2. The Cost of Something Is What You Give Up to Get it
3. Rational People think at the Margin
4. People respond to Incentives
1. People Face trade-offs

■ There isn't no such thing as a free lunch.

■ Like a student who has decided to spend her time for doing
studies is trading off his time with watching TV, working , bike
ridding etc.
■ Trade off is a situation when getting some aspect or thing by losing
other aspect or thing.
■ When people are grouped in a society face different kind of Trade-
off, one of the most common trade off is between “ gun and
butter”.
■ As the more society spends on national defense the less it can
spend on consumer goods.
■ Society also faces the trade off between
efficiency and equality

■ Efficiency means the society is getting

maximum benefits from its scarce
resources or it denotes the most effective
use of society's resources in satisfying
people wants and needs
■ Equality means those benefits are
distributed uniformly among society
members or it denotes the sense of
justice or fairness.
■ While designing government polices
often these two goals conflict. Like
income taxes
2. The Cost of Something Is What You
Give Up to Get it
■ Due to the trade-off, making decisions requires comparing the costs
and benefits of alternative course of action.
■ The alternative forgone is the opportunity cost
3. Rational People think at the Margin

■ Economist normally assume that the people

are rational
■ Rational people are those who systematically
and purposefully do the best they can to
achieve their objectives.
■ Marginal Change is the small incremental
adjustment to a plan of action.
4. People Respond to Incentives
How People Interact

5. Trade Can Make Everyone Better Off

6. Markets are Usually a Good Way to Organize Economic
action.
7. Governments Can Sometimes Improve Market Outcomes
5. Trade Can Make Everyone Better Off
6. Markets are Usually a Good Way to
Organize Economic action.
7. Governments Can Sometimes Improve
Market Outcomes
How the Economy as a Whole Work

8. A Country’s Standard of Living Depends on Its ability to

Produce Goods and Services
9. Prices rise When the Government Prints too Much Money
10.Society Faces a Short-run trade-off between Inflation and
Unemployment
8. A Country’s Standard of Living Depends
on Its ability to Produce Goods and
Services
9. Prices rise When the Government Prints
too Much Money
10. Society Faces a Short-run trade-off
between Inflation and Unemployment