The Seven Principles of Economics Mr. Robert Humphreys Riverside Preparatory High School

Many people often think of economics as a limited field of study, focusing primarily on money, taxes, banking, and trade. While these are important, these areas have lead economist to develop a series of principles that appeal to the wider world.

Principle #1: Scarcity forces Tradeoffs Tradeoffs are defined as the choosing of one thing over another. In a perfect world, tradeoffs wouldn’t exist simply because everyone would have everything they wanted. However, because of scarcity, tradeoffs force people to make choices over which decision to make. Also known as the “No-Free-Lunch Principle”

Principle #2: Cost vs Benefits While the scarcity forces tradeoffs principle forces us to make decisions, how do we know which decision is the right one for us? Economist argue that individuals make choices based on the expected cost and benefits of each option. Listing examples of both cost and benefits, the individual then weighs the pros and cons of each choice prior to making said decision. Let’s create an example.

Cost-Benefit Analysis of attending college Cost of attending Benefits of attending Expensive Career development Not making $ while enrolled Better job opportunities Maturation Impacted Improving overall life and wellness No guarantee of job after graduating

Principle #3: Thinking at the Margin Thinking at the margin involves thinking in terms of a little more of this or a little less of that, rather than all or nothing. Marginal cost: what is given up in order to add one unit to an activity. Marginal Benefit: what is gained by adding that one other unit. ie. Studying another hour after studying 2 already, or going to bed?

Principle #4 Incentives Matter Costs and benefits influence our behaviors, that is they act as incentives, or something that motivates a person to take a particular course of action. Incentives-matter principle argues that people respond to incentives in generally predictable ways. Incentives appear in both positive and negative forms. Teachers use grades and point values on assignments to encourage students to complete their assignments. Governments use fines and punishments to discourage people from committing crimes.

Principle #5 Trade makes People better off Why don’t you make the clothes that you wear? Grow your own food? Make your own furniture? Most people generally aren’t skilled at everything, nor should they be. This is where advanced skillsets and attributes come into play. The trade-makes-people-better-off principle tells us that by focusing on what we do well and then trading with others, we will end up with more and better choices than would have if we tried to do everything by ourselves.

Principle #6: Markets Coordinate Trade Market: any arrangement that brings buyers and sellers together to do business with each other. Operating freely, or with limited government interference, buyers and sellers can trade with each other until both are satisfied with their sales and purchases, resulting in an efficient market that serves everyone’s interest.

Principle #7: Future Consequences Count Generally speaking, people have the tendency to make decisions based on the immediate cost and benefits. However, by only looking at the short term effects, the long term effects can also occur. The future-consequences-count principle tells us that decisions made today not only have consequences today, but also in the future. Law of unintended consequences: the actions of people and governments always have effects that are not expected, or “unintended”.