Ten Principle of Economics and How Markets Work

Ten Principle of Economics and How Markets Work

ECO/365
August 6, 2018

When you hear the word "economies", most of the people might be reminded of things related social economy and the matter. However, economics is not only about like that scale of social phenomenon or issue, but also it is deeply related to our daily life. We use the finite and limited resources and make an effort to use that resources efficiently. Economics is an important subject to understand economic trends. Economists study it and forecast the economic trends. Since the economies influence the whole world and the individuals, we always keep our ears open for the trend of economies.

Ten Principles of Economics

To understand about people’s decision making, interacting with others, and the economy’s effect as a whole, we need to comprehend the principles of economics, including the technical terms such as trade-off, opportunity cost, rational people and marginal change, incentive, market economy, market failure, and inflation. First of all, Trade-Off what people must face on is a situational decision which is accompanied by losing or diminishing the other one. According to this trade-off theory, if one thing increases, another thing decreases at the same time. As second principle, to obtain something we cannot avoid the opportunity cost which we must be given up. Therefore, to make an efficient decision, the decision maker has to be aware of the occurrence of opportunity cost. Third, rational people consider the margin benefit before they make an action. To meet the "edges" of what we look forward to it, the rational decision makers need to consider the margin benefit or marginal cost. Forth, incentives are crucial to induce people to act. Especially, since rational people make a decision by considering and comparing the benefits with other choices, they respond to incentives. As a simple example, as the gas price keeps racing, many drivers have changed to a small car, leading to better fuel economy and additional benefits.

The previous four principles were about how the individual make decisions. The next three principles discuss about how people interact with others. As fifth, trade makes us better off. Trade makes better condition of market for consumers and supplier more focus on their specialty. Sixth, unlike communism, in a market economy, many planners influence organize economic activities. However, like communism, government sometimes control the scarce resources and improve market outcomes and there are what roles should government play for market economy. (seventh of principle).

These last three principles are about how economies work as a whole. As eight of the principles,  productivity of goods and services directly connected to countries' standard of living. Productivity is the available amount of goods and services produced by labors, and it determines the average income and also this related to national power. Ninth, there is a relationship between inflation and economic growth. The overprint of paper money causes inflation and If the inflation rate increase the overall level of prices also increase due to the depreciation of the currency. Tenth, for the short-run (1~2 years), inflation and unemployment have the trade-off relationship. For example, if currency increases, consumers' expenses increases and this reflects on increasing of supply and demand for goods and services. And, due to the increased demand, firms hire many employees and this influences on reduced unemployment.  In brief, we will discover that all the ten principles of economics are appearing aware of the scarcity of resources.

How Markets Work

         Since there are scarce resources, society manages those by trading with each other. As an example, China has the absolute advantage of lower labor cost, and there are many factory areas cause China has huge land. Therefore, most of the major companies such as Samsung, Apple, LG, and also other major apparel companies trade with China for the manufacturing. With economic interdependence, other companies use the scarce resources and make benefits.

The theory of law of demand is reflected on the demand curve. If the price of a commodity falls, the consumer's purchasing demand increases. Also, why the supply curve slopes upward is because it reflects the higher price. Supply is determined by the marginal cost of a commodity. The equilibrium is a condition that economic forces between supply and demand are balanced. Economic equilibrium might be a point of equal demand and supply for products.

         There are two types of definition of market control; price ceiling and price floor.  Government impose the legal maximum and minimum prices to control the market price. Not only for these, government has to play a role to maintain and improve the market economies such as taxes, and equilibrium prices.

References

Mankiw, N. G. (2016). Principle of microeconomics. Boston: Cengage Learning.