10 Major Principles of Economics

(Content: Prof. Vishwa Ballabh)

1. People face tradeoffs. Example: if I have Rs. 7 with me and I'm hungry, I can either buy a vada pav or a chocolate bar
2. The cost of something is what you give up to get it. Example: cost of PGCBM14 is 1.8 lacs + the value of time spent with family + the value of extra sleep + the value of all the reference material we buy + the value of the time you spent on the internet reading blogs like these + ... Opportunity Cost of an item is what your give up to get that item.
3. Rational people think at the margin. Here we are talking of comparison of marginal benefits against the marginal costs. Example: if I plan to spend Rs. 400 to buy a 2GB Flash Drive but there is an offer that if I spend Rs. 100 extra, I will get a 4GB Flash Drive. In such a case, I can compare the additional benefit derived against the additional cost incurred and a decision can be taken accordingly.
4. People respond to incentives. Everyone knows what we are talking about here :) Example: Usually, if there is no salary people may not like to work at all!
5. Trade can make everyone better off. Example: If each person trades his / her best services and gets rewarded in some form or the other for it, it will be an ideal situation. This will ensure that there is a huge variety of goods and sevices that you can buy or subscribe to, at various costs.
6. Markets are usually a good way to organiza economic activity. For what we discussed in the previous point, there has to be a market place where all the goods and services can be exchanged. If each person works in isolation, there will be no exchange. A market will also create healthy competition.
7. Governments can sometimes improve market outcomes. Governments have the power to regulate market factors by way of rules and regulations and mass scale change in economic drivers. Market failure is a term used to refer to a situation in which the market on its own fails to produce an efficient allocation of resources.
8. A country’s standard of living depends on its ability to produce goods and services. Productivity of the population plays a major role in this case.
9. Prices rise when the Government prints too much money. We can vaguely relate this to inflation. The more currency notes we have in the country, the value per note falls down. Hence, the purchasing power per note also becomes lesser.
10. Society faces a short-run tradeoff between inflation and unemployment. The cycle goes like this... increase in the amount of money in the economy -> people have more money -> people spend more -> demand for goods and services increase -> due to increase in demand, firms rise prices and production -> hire more resources to produce more -> thus unemployment decreases