Nine Principles of Economics

by: Art Carden

A small set of ideas does most of the heavy lifting in economics. “Ten Principles of Economics” or “Ten Big Ideas” or “Ten Key Elements of Economics” are pretty standard in most introductory economics books. Here’s my version, based on Chapter 1 of The Economic Way of Thinking.

1. People Act. People choose goals (ends), and they choose ways to achieve those goals (means). One of your goals, presumably, is to obtain a well-rounded liberal education. Taking econ 100 is one of the means you have chosen to that end. This also implies subsidiary means-ends relationships. Suppose one of your goals is “pass econ 100.” Reading the textbook, doing the assignments, coming to class, visiting office hours, and visiting the peer tutor are means to that end.

2. Every Action Has a Cost. When you do one thing, you give up the opportunity to do another. For example, you have an almost limitless range of options right now. You could be eating, sleeping, working, or chatting with your friends, but you have chosen instead to read this assignment. Your next best alternative is the cost you have incurred in order to read the assignment. If preparing for the first class takes five hours and your next best alternative is working for $8 per hour, then preparing for class has cost you the opportunity to earn $40 (we will shorten this periodically and say that “preparing for class” cost you $40). You will also hear people say “there is no such thing as a free lunch,” and indeed, free stuff isn’t free. If you spend thirty minutes in line waiting for a slice of free pizza and your next best alternative would be working for $8 per hour, then that slice of pizza has cost you the opportunity to earn $4.

3. People Respond to Incentives. Incentives motivate people to action. People will do more of something as the cost falls, and they will do less of it as the cost rises (the law of demand). Similarly, they will try to supply more of something that gets more remunerative and less of something that gets less remunerative (the law of supply). Prices are some of the most important incentives in economics. The price is the number of dollars that have to be traded for something ($2 for a cup of coffee, for example). Market prices emerge from the interactions of buyers and sellers.

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Reposted from Mises Economics Blog