Although the study of economics has many facets, the field is unified by several central

ideas. The Ten Principles of Economics offer an overview of what economics is all about.

1. People Face Tradeoffs.

To get one thing, you have to give up something else. Making decisions

requires trading off one goal against another.

You may have heard economists say there is no such thing as a free lunch.
What they mean by this is that, for example, you might get a free bowl of soup
at the student co-op, but the soup is not free because you have to give up 35minutes waiting in line to be served.

2. The Cost of Something is What You Give Up to Get It.

Decision-makers have to consider both the obvious and implicit costs of their

actions.
Making a decision requires comparing the costs and benefits of alternative
courses of action. The cost of one option is not how much it will cost in dollar
terms, but rather the value of your second best alternative, ie., consider the
following business problem (Project Gold Mine). Your client says to you,
Currently we run a single gold mine (Mine A) and are trying to decide
whether we should expand Mine A or build a second mine (Mine B). Which
project should we undertake? In this problem there are three possible
recommendations: (1) expand Mine A, (2) build Mine B, or (3) do nothing
(i.e. maintain the status quo). To make a recommendation, you will need to
consider the benefits and costs of each course of action.

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.

People make decisions by comparing the marginal benefit with the marginal
cost. For example, you might buy one cup of coffee in the morning because it
helps you start the day, but you might not buy a second cup because this gives
you no extra benefit (and costs another $3).

4. People Respond to Incentives.

Behavior changes when costs or benefits change.

For example, if your hourly wage increases then you are likely to work more
(unless of course your income is already too high).

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 or services.
For example, you may be a skilled management consultant. Money you earn
through your consulting work might be used to build a house even though you
may not have the skills to build the house yourself.

6. Markets Are Usually a Good Way to Organize Economic Activity.

Households and firms that interact in market economies act as if they are
guided by an "invisible hand" that leads the market to allocate resources
efficiently. The opposite of this is economic activity that is organized by a

central planner within the government.

Individuals and firms that operate in a market economy respond to prices and
thereby act as if guided by an invisible hand which leads the market to
allocate resources efficiently. For example, if there is an oversupply of wheat
on the world market then individual farmers will lower the price they charge
until they can sell all of their wheat. Lower wheat prices will also likely
reduce the total quantity of wheat that farmers decide to produce. Market

prices are able to adjust to equate supply and demand without the need for any
central planning.
7. Governments Can Sometimes Improve Market Outcomes.

When a market fails to allocate resources efficiently, the government can

change the outcome through public policy. Examples are regulations against

monopolies and pollution.

Sometimes a market may fail to allocate resources efficiently, and government
regulation can be used to improve the outcome. Market failures can occur due
to the existence of public goods, monopolies and externalities. For example,
an electricity supplier might have a monopoly. Government regulation may be
required to ensure that the supplier does not abuse its market power.

8. A Country's Standard of Living Depends on Its Ability to Produce Goods and

Services.

Countries whose workers produce a large quantity of goods and services per
unit of time enjoy a high standard of living. Similarly, as a nation's

productivity grows, so does its average income.

A country whose workers produce a large number of goods and services per
unit of time will enjoy a high standard of living.

9. Prices Rise When the Government Prints Too Much Money.

When a government creates large quantities of the nation's money, the value of
the money falls. As a result, prices increase, requiring more of the same

money to buy goods and services.

Printing money causes inflation. When a government prints money, the
quantity of money increases and each unit of money therefore become less

valuable. As a result, more money is required to buy goods and services.

QUANTITATIVE EASING isa monetary policy tool sometimes employed by
central banks to stimulate the economy when conventional monetary policy
becomes ineffective. To stimulate the economy, the central bank normally

carries out expansionary monetary policy by lowering short-term interest rates

through the purchase of short-term government securities. However, when the
short-term interest rate gets close to zero it becomes impossible to lower the
short-term interest rate further and so this policy tool can no longer be used to
stimulate the economy

10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.

Reducing inflation often causes a temporary rise in unemployment. This tradeoff
is crucial for understanding the short-run effects of changes in taxes, government
spending and monetary policy.
The Phillips curve is a historical inverse relationship between the rate
of unemployment and the rate of inflation in an economy. Stated simply, the lower
the unemployment in an economy, the higher the rate of inflation. While it has
been observed that there is a stable short run tradeoff between unemployment and
inflation, this has not been observed in the long run.[