#econrocks

[tuesday5econlive]

10 Principles of Economics

How People Make Decisions

Principle 1: People Face Tradeoffs 

Society faces trade-offs between equity and efficiency. Efficiency is defined by society getting the most from its scarce resources. Equity is defined as distributing economic prosperity fairly among the individuals in society. Students face making decisions all the time. A student faces a tradeoff between studying for an exam or to watch a newly released movie that they have been dying to watch.

Principle 2: The Cost of Something Is What You Give Up to Get It

When making decisions, you have to weigh the costs and benefits of the alternative choice. Opportunity Cost is a core term which means whatever must be given up to obtain some item. In the cartoon show above, it can demonstrate how students such as myself or anyone with a job can contemplate calling in sick on days of work in order to sleep in or reserve the day for something much more enjoyable. Although, if you do go into work and avoid calling in sick, your check will come out much more bigger which is also very desirable. You must give up one to obtain the other. I’ve called in sick, in the past, in order to sleep in, it was worth it. 

Principle 3: Rational People Think at the Margin

A rational decision maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. The marginal changes in costs or benefits motivate people to respond. When a student considers whether to go to college for an additional four years, they compare the fees and foregone wages to the extra income they could earn with the extra four years of education.

Principle 4: People Respond to Incentives

An initiative is something that induces a person to act. In this case, as shown above, a student found out that economics majors have better chances of getting well-paid jobs after graduation. This cause the student to act on the information, and then became an economics major for the future benefits that it can have in terms of salary. I actually am going to declare in economics, and this is a partial reason I acted on going to the major.

How people Interact

Principle 5: Trade Can Make Everyone Better Off

Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods and services. My roommate is a better cook than I am, and I clean more quickly than my roomate can. Therefore, we divide each task based on the task we specialize in. By doing so, I reduce the total amount of time spent on chores.

Principle 6: Markets are Usually a Good Way to Organize Economic Activity

The Market Economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. In the picture above, it can be seen how each household and firms think. Such as the household being able to decide on which firms to work for and what to buy with their income. As I would spend my entire check in Sephora. Similarly, firms decide what they want to produce and who to hire. Such as last summer when Ross decided to choose and hire me. The last one shows the end-goal of overall economic well being which can be directed by the “invisible hand” whom leads to desirable market outcomes. 

Principle 7: Governments Can Sometimes Improve Market Outcomes

When a market fails to allocate resources efficiently, the government can change the outcome through public policy such as setting regulations against monopolies and pollution. A dry cleaning factory pollutes water when they dispose of the chemically polluted water. The government has the task of regulating and auditing the activities of the market. Hence, the government can implement regulating policies to protect the environment.

How the Economy as a Whole Works

Principle 8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services

Around the world there is staggering differences in the standards of living which is solely based on the country’s production levels. Production is the quantity of goods and services produced from each unit of labor input. Therefore, the higher the level of production, the better the standard of living is for the country as a whole. My picture can depict a person, in this case me, starting to work a minimum wage job here in the United States, and because of the good amount of pay in comparison to other counties, I was able to put a down payment on a car in a timespan of a couple months. But in the last picture, it can depict a boy who cannot afford food. We can predict that this country has very low levels of production which cause this low standard of living.

Principle 9: Prices Rise When the Government Prints too Much Money

When a government creates large quantities of money within the nation, the value of the money falls resulting in the increase of prices, requiring more of the same money to buy the goods and services. The faster the government creates money, the greater the inflation rate. One example of the effects of inflation can be seen by comparing the prices of gas 30 years ago and now. 30 years ago, the cost of a gallon of gas used to be $1.28. Now, the cost of a gallon of gas is $3.87.

Principle 10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment

As a society we try to avoid both inflation and unemployment but that isn’t possible. But what does a short-run tradeoff mean? Well it’s means that over a course of a year or two, many economic policies push inflation and unemployment in opposite directions. Therefore, we are stuck with trade offs between the two. As depicted in the first square, these two problems are on a teeter totter. The but following square shows policymakers trying to come up with solutions to this problem. An example can be when Obama set in policies that reduced taxes and increasing government spending to pick up the economy from the economic turndown in the housing markets. Personally, this did affect me and my family by not being able to obtain a house as easy due to the exceeding high prices in the market, these high numbers can also be seen in rent today, such as the monthly pay for housing here on campus. 

Krystal Chavez (ID# 67208797) 

Jessica Pineda (ID# 89151998)