Principles of Economics

S2- MASTER AEM

Pr Kaltoum Lajfari - FSJES Souissi
Principles of Economics

Economics is the study of how society

manages its scarce resources

How people make How the economy as a

decisions How people interact whole works
 4 Principles about individuals decisions making
An economy? The economy of Morocco, the economy of France, …
The behaviour of individuals

4 Principles about individuals decisions

making

Principle 1 Principle 4:
People face trade-offs People respond to
incentives

Principle 2: Principle 3:
the cost of something is Rational people think
what you give up to get it at the margin
Principle N°1- People face trade-offs
to get something we like, we usually have to give up something else that we also like

Example: spending your income

Not just an individual matter but it concerns the society as a whole (example: the
Government)

Efficiency and Equality

Efficiency: society is getting the maximum benefits from its scarce resources
Equality: those benefits are distributed uniformly among society members
Principle N°2- The cost of something is what you
give up to get it

the opportunity cost

Whatever must be given to obtain some item

Principle N°3- Rational people think at the margin

Rational people: people who systematically and purposefully do the best they can to
achieve their objectives
they compare costs and benefits

margin: marginal benefits/marginal costs

Principle N°4- People respond to incentives

Incentive: Something that induces people to act

buyers and sellers react to prices

Role of policies: increase in tax/paying fees in case you do not respect the regulation
3 Principles about how peopole interact

3 Principles about how people interact

Principle 5 Principle 7
Trade can make Governments can
everyone better off sometimes improve
market outcomes
Principle 6
Markets are usually a
good way to organize
economic activity
Principle N°5- Trade can make everyone better off
Trade allow each person to specialize in the activities she does best.

By trading with each other, people can buy a greater variety of goods and services at
lower cost.
Principle N°6- Markets are usually a good way to
organize economic activity

Communist countries operated on the premise that government officials were in the best position to
allocate the economy’s scarce resources.

These central planners decided what goods and services were produced, how much was produced,
and who produced and consumed these goods and services.

Only the government could organize economic activity in a way to promote economic well-being for
the country as a whole.

Market economy: an economy that allocates resources through the decentralized decisions of many
firms and households as they interact in in markets for goods and services.

Adam Smith- The invisible hand

Principle N°7- Governments can sometimes improve
market outcomes
If the invisible hand of the market is so great, why do we need government?

Efficiency Vs Equality
1-We need the government to enforce the rules and maintain the institutions that are key to a
market economy.
property rights - the ability of an individual to own and exercise control over scarce resources.
2- Market failure: a situation in which the market left on its own fails to allocate resources
efficiently.
One possible cause of market failure is an externality (the impact of one person’s actions on the
well-being of a bystander).
Another possible cause to market failure is market power (the ability of a single person or firm to
unduly influence market price).

Equality- tax policies...

3 Principles about how the economy works as a
whole
3 Principles about how the economy works
as a whole

Principle 8 Principle 10
A country’s SL Society faces a short
depends on its ability trade-off between
to produce G/S inflation and
unemployment
Principle 9
Prices rise when the
government prints too
much money
 Principle N°8- A country’s SL depends on its
ability to produce G/S
Citizens of high income countries have more G, health care… Living standards.

Increase of income over the years.

What explains these large differences in LS among countries and over time?

Productivity
the quantity of g/s produced from each unit of labor input.
In nations where workers produce a large quantity of g/s per hour, most people enjoy a high
standard of living.

The growth rate of a nation’s productivity determines the growth rate of its average income.

Public policies --- impact productivity ( education, technology….)

Principle N°9- Prices rise when the government
prints too much money

Inflation - an increase of the overall level of prices in the economy.

the growth of the quantity of money (In the long run).

Central banks - controlling the supply of money - controlling IR

Principle N°10- Society faces a short trade-off
between inflation and unemployment
The short run effects of money injections:

● increase of spending (MS-IR-Loans-

Spending)

● Higher demand may overtime cause

firms to increase their prices, but in the
meantime, it also encourage them to hire
more workers and produce more g/s -
decrease of unemployment.