Ten Principle of

economics
 10 principle of economics
1. People face tradeoffs ❑ How people make decisions (4 principles)
2.The cost of something is what you give up to get it ❑ How people interact with each other(3 principles)
3. Rational people think at the margin ❑ The forces and trends that effect how the economy
as a whole works(3 principles)
4.People respond to incentives
5.Trades can make everyone better off
6.Markets are Good way to organize economic activity
7. Governments can improve sometimes market outcomes
8. A country standard of living depends on its ability to produce
goods and services
9.Prices rise when the governments pins too much money.
10.Society faces a short run trade off between inflation and
unemployment.

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 HOW PEOPLE MAKE
DECISIONS

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 1.
People face Tradeoffs

❖ There is no such thing as a free lunch.

❖ To get one thing we usually have to give up another thing.

❖ Making decision requires trading off one goal against another.

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 Examples of Tradeoffs

❖ How a students spend their time

❖ How a family decides to spends it incomes

❖ How the government spend tax

❖ How the regulation may protect the environment at a cost to firm

owners

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 Special Examples of Tradeoff

❖ Efficiency Vs. Equity

▪ Efficiency means society gets the most that it can from its scarce resources
▪ Equity means the benefit of those resources are distributed fairly among the
members of society
Example Tax paid by wealthy Nepalese and then distributed to less fortunate
Outcome Increased equity and reduced efficiency

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 2.
The cost of something is that is what
you give up to get it
❖ Decisions require comparing costs and benefits of alternatives

o Whether to go to college or to work

❖ The opportunity cost of an item is what item you give up to
obtain that item
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What are the cost of going to college?
_Tuition costs?
_Room and board?
_Forgone pay?

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 🏰
What is the opportunity of cost of seeing a movie?
_cost of admission?
_time cost of going to the theater?
_time cost of attending the show?

Note: Time cost depends on what else you might do with that time.
Examples: Staying at home and watch tv , working an extra three hours at paid job

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 3.
Rational people think at the Margin up

❖ Many decision in life involve incremental decisions : should I take

another course this semester?

❖ Marginal changes are small, incremental adjustments to an

existing plan of action.

❖ People make decisions by comparing costs and benefits at the

margin.

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 4.
people response to incentives

❖ Because people make decisions by weighing costs and benefits ,

their decisions may change in response to changes in costs and
benefits.

❖ Example : Seat belt laws increases use of seat and lower the
incentives of individuals to drive safely.

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How people interact

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 5.
Trade can make everyone better off

❖ People gain from their ability to trade with on another.

❖ Competition results in gains from trading.

❖ Trade allows people to specialize in what they do best.

❖ Examples: Most families do not build their own homes , make

their own clothes , or grow their own food.

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 6.
Markets are usually a good way to
organize economic activity
❖ A market economy is an economy that allocate resources
through the decentralized decision of many firms and
households as they interact in markets for goods and services.

❖ Adam smith made the observation that households and firms

interacting in markets acts as if guided by an “invisible hand”-
market prices

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 7.
Government can sometimes improve
market outcomes
❖ Market failure occurs when the market fails to allocate
resources efficiently.
❖ Market failure may be caused by
o An externality, which is the impact of one person or firm’s action on
the well being of a bystander
o Market power , which is the ability of a single person or firm to
unduly influence market prices.
❖ When the market fails (break down)government can intervene
to promote efficiency and equity.

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 HOW THE ECONOMY
AS A WHOLE WORKS

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 8.
The standard of living depends on a
countries production
❖ Standard of living can be measured in different ways:
o By comparing personal incomes.
o By comparing the total market value of a nation’s production(GDP ,
Gross domestic product).

❖ Almost all variations in living standards are explained by

differences in countries productivity.

❖ Productivity is the amount of goods and services produced

from each hour of a worker’s time.
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 9.
Prices rise when the government prints
too much money

❖ Inflation lies in an increase in the overall prices of the economy.

❖ One cause of inflation is the growth in the quantity of money.

❖ When the government creates large quantities of money , the

value of the money falls.

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 10.
Society faces a short-run tradeoff
between inflation an unemployment

❖ The Phillips Curve illustrates the tradeoff between inflation and

unemployment.

It’s a short run trade off.

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 Our process is easy

first second last

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 thanks!
Any questions?
You can find me at
Mukundk.das@apexcollege.edu.np

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