The 10 principles of economics are:
- People face trade-offs. To get something that we like, we usually have to give up something else that we also like.
- The cost of something is what you give up to get it. This is the concept of opportunity cost, which measures the value of the next best alternative that is forgone as a result of a decision.
- Rational people think at the margin. Rational people make decisions by comparing the marginal benefits and marginal costs of an action, not by comparing the total benefits and total costs.
- People respond to incentives. Incentives are something that induces a person to act, such as a reward or a penalty. Changes in incentives can affect people's behavior in predictable ways.
- Trade can make everyone better off. Trade allows people to specialize in what they do best and to enjoy a greater variety of goods and services at lower prices.
- Markets are usually a good way to organize economic activity. Markets are the institutions that bring together buyers and sellers of goods and services. In a market economy, prices and profits guide the allocation of resources and the production of goods and services.
- Governments can sometimes improve market outcomes. Sometimes markets fail to achieve efficiency or equity, due to externalities, public goods, market power, or incomplete information. In such cases, governments can intervene to correct the market failures and improve social welfare.
- A country's standard of living depends on its ability to produce goods and services.The most important determinant of a country's standard of living is its productivity, which is the amount of goods and services produced per unit of labor input.
- Prices rise when the government prints too much money. This is the phenomenon of inflation, which is an increase in the overall level of prices in the economy. Inflation is caused by excessive growth in the quantity of money, which reduces the value of money.
- Society faces a short-run trade-off between inflation and unemployment. This is the Phillips curve, which shows that in the short run, there is a negative relationship between inflation and unemployment. To reduce unemployment, the government can stimulate aggregate demand, which increases output and prices. To reduce inflation, the government can contract aggregate demand, which decreases output and prices. However, in the long run, the economy tends to return to its natural rate of unemployment, which is determined by structural factors, not by aggregate demand. Therefore, the long-run trade-off between inflation and unemployment is vertical, not downward sloping.