In this article, we will introduce the ten principles of economics, their historical background and related examples, and explain their importance in the operation of the economy.
1. Historical origins.
The formation of the Ten Principles of Economics can be traced back to economists such as Adam Smith in the 18th century.
During this period, the Industrial Revolution brought about tremendous economic changes, and people began to think about how to better understand and manage economic activities.
Adam Smith's The Wealth of Nations is a landmark work in economics, which contains some basic principles of economics, such as the division of labor and **.
Over time, economists have gradually developed more principles on these foundations, and formed a framework of the ten principles of economics.
2. Overview of the ten principles.
1. People face trade-offs
When people form a society, they face a variety of trade-offs.
The typical choice is between "cannon and butter", when a society's spending is more on defending the coastline from foreign invasion (artillery), and less on consumer goods (butter) to improve domestic living standards.
Equally important in modern society is the trade-off between a clean environment and a high income level.
Recognizing that people face trade-offs does not in itself tell us what decisions people will or should make.
However, it is important to recognize the trade-offs in life because people can only make good decisions if they understand the choices they face.
2. The cost of something is what you give up to get it
The opportunity cost of something is something that is given up in order to get it.
When making any decision, such as whether or not to attend college, decision-makers should recognize the opportunity cost that comes with every possible choice.
In fact, decision-makers are usually aware of this.
Athletes of college age who can make millions of dollars if they drop out of school and pursue professional sports are keenly aware that the opportunity cost of going to college is extremely high. It's no surprise that they often decide that it's not worth the cost to reap the benefits of going to college.
3. Rational people think at margin
"Marginal quantity" refers to the amount of change in an economic variable under certain influencing factors.
Economists use the term marginal change to describe small incremental adjustments to an existing plan of action, which is an adjustment around the edges of what you do.
Individuals and businesses will make better decisions by considering marginal quantities. Moreover, a rational decision-maker will only take an action if its marginal benefits outweigh its marginal costs.
4. People respond to incentives
Because people make decisions by comparing costs and benefits, when costs or benefits change, people's behavior changes. This means that people will respond to incentives.
However, policies can sometimes have an impact that is not obvious in advance. When analyzing any kind of policy, we should consider not only the direct impact, but also the indirect impact that occurs through incentives. If policies change incentives, it will make people change their behavior.
5. Trade can make everyone better off
Perhaps you have heard in the news that in the world economy the Japanese are competitors to the Americans.
In fact, the ** between the two countries can make the situation better for both countries.
In a sense, every household in the economy competes with all the others. Despite this competition, isolating your family from all the others will not make it better for everyone. By trading with other people, people can obtain a wide variety of goods and services at a lower cost.
6. Markets are usually a good way to organize economic activities
Before 2014, most countries that used to have a planned economy had abandoned this system and worked hard to develop a market economy.
In a market economy, planners' decisions are replaced by those of millions of businesses and households. These businesses and households trade with each other in the marketplace,** and personal interests guide their decisions.
7. Governments can sometimes improve market outcomes
Why do we need **?
One answer is that the invisible hand needs ** to protect it. The market can only function if property rights are secured.
However, there is another answer. There are two types of reasons for intervening in the economy: promoting efficiency and promoting equality. Although the invisible hand usually allows the market to allocate resources efficiently, this is not always the case. Economists use the term market failure to refer to a situation in which the market itself is unable to allocate resources efficiently.
Just because we say that sometimes market outcomes can be improved doesn't mean it always does. One of the purposes of studying economics is to help you determine when a policy is appropriate to promote efficiency and justice.
8. A country's standard of living depends on its ability to produce goods and services's standard of living depends on its ability to produce goods and services）
The differences in living standards between countries around the world are striking. The standard of living also changes greatly over time. What can be used to explain the huge differences in living standards between countries and over time?
The answer is that almost all changes in living standards can be attributed to differences in productivity across countries.
The relationship between productivity and living standards also has far-reaching implications for public policy. When considering how any one policy affects living standards, the key question is how it affects our ability to produce goods and services.
9. Prices rise when the government prints too much money
What causes inflation?
In most cases of severe or persistent inflation, the culprit is always the same - the growth of the amount of money. When a ** creates a large amount of national currency, the value of the currency falls.
10. Society faces short-run trade-off between inflation and unemployment
When the amount of money in the economy is increased, one result is inflation, and the other is a reduction in the level of unemployment, at least in the short term. The curve that illustrates the short-term trade-off between inflation and unemployment is called the Phillipscurve, named in honor of the first economist to study this relationship
1) The amount of money increases, raising the level of spending, thereby stimulating the demand for goods and services;
2) Long-term high demand leads to high prices, which in turn leads to more production and more employment
3) More employment means less unemployment.
Economists still debate the Phillips curve, but most economists accepted the idea before 2014 that there is a short-term trade-off between inflation and unemployment.
This simply means that, over a period of one or two years, many economic policies are driving inflation and unemployment in the opposite direction. Policymakers face this trade-off, whether inflation and unemployment start at high levels (as was the case in the early '80s), low levels (as was the case in the late '90s), or somewhere in between.
3. Relevant examples.
1. People face trade-offs.
A person has a certain amount of working time and leisure time, and he needs to choose between work and leisure. If he chooses to work more hours, he can earn more money, but may sacrifice leisure and family time.
2. The cost of something is something that is given up in order to get it.
Buying a new car requires not only paying for the purchase**, but also costs such as maintenance, insurance, and fuel. These additional costs also need to be taken into account, not just the vehicle itself.
3. Rational people consider marginal quantities.
Consider a business that, as it hires more workers, the output that each additional worker brings is likely to be diminishing. As a result, companies need to weigh the additional output of hiring more workers against the cost of hiring workers.
4. People will respond to incentives.
If taxes are raised, individuals and businesses may reduce consumption and investment to accommodate higher tax burdens. Conversely, individuals and businesses may increase consumption and investment if tax breaks or subsidies are offered.
5. It can make everyone better.
Between two countries, each country can focus on the products and services it excels at. For example, one country is good at making cars, while the other is good at growing fruits, and by **, the two countries can benefit from each other.
6. The market is usually a good way to organize economic activity.
For example, the market coordinates the buying and selling of the market through the mechanism and the relationship between supply and demand, thereby promoting the allocation of resources and the flow of capital.
7. Sometimes it can improve market results.
* Competition and the normal functioning of the market can be maintained by regulating the market, protecting consumer rights, and providing public goods and services.
8. A country's standard of living depends on its ability to produce goods and services.
Suppose there is country A and country B. Country A has abundant petroleum resources and has advanced oil extraction technology, which is capable of producing oil and petroleum products in large quantities. This has enabled country A to export oil, earn huge foreign exchange earnings, and improve the living standards of its inhabitants.
In contrast, Country B has no oil resources, but it focuses on developing manufacturing and innovative technologies to improve the living standards of its inhabitants by producing high-quality products such as electronics and automobiles, providing jobs and increasing domestic income.
9. When too much currency is issued, prices rise.
When a country overissues money or has too much demand, it will, triggering inflation.
10. Society faces a short-term trade-off between inflation and unemployment.
By increasing production efficiency, technological innovation, and improving resource allocation, a country can achieve economic growth and improved social welfare.
Fourth, summary. The Ten Principles of Economics are the cornerstones of economic research, and they help us understand the basic laws of economic behavior and decision-making. The historical origins of these principles can be traced back to economists in the 18th century.
By understanding these principles, we can better explain and improve economic phenomena and provide guidance for the formulation of economic policies.
By introducing some historical context and concrete examples, we can understand these principles more vividly and apply them to practical situations.