The ten principles of the economy and its concepts
Introduction
The economy whose meaning is "the one who manages a home". Hence the close relationship that the economy with households has;since both decisions are made on how to administer and distribute the resources that turn out to be scarce in society. Scarcity is a very important concept for the study of matter because it tells us that society has resources that are finite;Economists study the way in which people have to decide between two or more things, also as they work in the market, prices, quantities, buyers and vendors, and finally analyze how these different forces affect the economyas a whole. We find all this a little more detailed in each principle that we will know as we move forward in the study of the subject learning new concepts that will serve us in the future to have a clearer vision of how the society and the behavior of individuals works. Throughout the writing we will find important and relevant concepts for the study of it that goes from microeconomy, such as scarcity, efficiency, equal to, opportunity cost, market, market failures, externalities, etc. to the macroeconomy that studies itAll as a whole such as inflation, growth rates, etc.
Developing
How individuals make decisions
- People face dilemma
Within the first group of the principles “how individuals make decisions” we have the first principle that tells us that people face dilemma, this means that it is one thing or the other, for example if a university student decides between devoting his time toMake an economy trial or play on the computer, when at home it is decided on what to spend the money if in clothes or food. Already when people are grouped into societies, they face different diyuntivas, for example that of equality and efficiency. Equality means distributing resources equally to all members. Efficiency means getting most to those resources that are scarce. But what is the dilemma that we find in these two concepts? When government policies are carried out favoring the less fortunate in society by distributing in equal parts the income of the rich, which reduces the reward of the hard work they do to obtain everything and in turn the efficiency is reduced by working less and takes themto produce less goods and services.
- The cost of something is what is renounced to obtain it
As a second principle we have, the cost of something is that to which it is renounced to obtain it, as it is known that individuals in the decision -making process face disjunctive we must know the cost and benefit for which we decided something instead ofanother option. For example, when we decidewhat is the cost? The cost of having gone to the cinema with friends, very apart from the money we can have spent on popcorn, soft drinks, there is something much more valuable that is the time we spend watching the movie we can use it to study and get a higher rating than the one than whatWe would get if we didn’t study enough. This example leads us to a concept, opportunity cost of one thing is what we give up to obtain it. Which will be very important for any decision making.
- Rational people think in marginal terms
As we have third principle, rational people think in marginal terms, economists generalize assuming that all people are rational, who are individuals who take advantage of the minimum opportunities to achieve their objectives. In life, the decisions that are made rarely are between choosing black or white existing so many gray, for example at the time of food, we cannot decide between eating in excess and not eating, what a rational person does is choose to eata minimum food ration. Likewise, we can apply at sleep it can not decide to sleep much and not sleep anything because an hour we use to drmir could use it to pass on the cell phone watching social networks. These small adjustments or changes to a given plan are known as marginal change, in which marginal comes from the word margin that means "edge", so it is said that rational people think in marginal terms because for their decisions alreadytaken have a plan B by if any variable is not as expected. For example, the corner restaurant of my life that sells lunches at $ 3.50 and around 3 in the afternoon he has the last one and it is almost time to close and a young man approaches for him but he only has$ 2.50. Should lunch be sold? Of course, because the marginal cost of selling it is that the restaurant will have one more customer to lose a sale.
- People respond to incentives
As a fourth principle we have, people respond to incentives. Incentives is something that induces a person to act in a certain way, rational people once made a decision comparing the opportunity cost, marginal benefits and costs are influenced by incentives. To know how markets work, incentives are fundamental for their analysis, a very clear example can be seen in the offer when prices increase it is more profitable to produce more than good good.
How people interact
- Commerce can improve everyone’s well -being
Within the second group, "how people interact", we have the fifth principle that tells us that trade can improve everyone’s well -being, because it allows each person or country to specialize in the activities they know best and of which and of whichIt has the resources to carry it out in optimal conditions and when tradeing that product they are all benefited.
- Markets are usually a good mechanism to organize economic activity.
As sixth we have, the markets are usually a good mechanism to organize economic activity, after the fall of communism during the 80’s The majority of governments went from being centralized, this means that the government was the onlyable to plan how good or service occurred and those who should consume them, as well as the only one capable of organizing economic activity. After that, most countries set aside that system that led them to the economic failure of their nation developing the market economy that tries to assume resources through free decisions of the people and companies that interact in the markets of goodsand services. This principle leads us to one of the most famous observations of the economy in which Adam Smith, the father of the economy, affirms that “households and companies interact in markets as if they were guided by an invisible ´ manner ‘thatleads them to obtain the desirable market results ".(Mankiw, 2016). According to Smith, when the Government prevents the market from working naturally, it also prevents it from doing it invisible the hand, which decoupled the decisions of millions of families and companies that make up the economy.
- The government can sometimes improve market results
As we have seventh principle, governments can sometimes improve market results, to improve the market, not only the invisible hand that guides naturally but also sometimes the government is necessary to assert the rules and maintain the institutions that the institutions thatThey are fundamental in a market economy. In turn, market economies need institutions to value their property rights that are used for people to exercise property and control over these scarce resources. To promote efficiency, the government is necessary because although the invisible hand has a lot. Following these failures there may be others, as is an externality that is an effect of one person’s actions on the well -being of others, in other words we can put an ejmelo for externalality is pollution, either by the climate issomething we cannot control. Another market failure that can be taken is, the market power, which refers to when an actor or group of economic actors can exert on the considerable influence of market prices.
How the economy works as a whole
- The standard of living of a country depends on its ability to produce goods and services
Within the last group of the economy principles "how the economy works as a whole", we have the eighth principle, the standard of living of a country depends on its ability to produce goods and services, there is a difference notable between the standard of living ofA developing or first -world country with a Third World, since the first world have a wide productivity of goods that are distributed in many parts of the world that represents better income for their country for its citizens, but what is productivity? It is the amount of goods and services produced by each work unit. The productivity and standard of living of a country are strongly related to each person’s annual income.
- When the government prints a lot of money, prices increase
As a ninth principle, we have, when the government prints too much money, prices increase;This is mainly for the countries that are owners of their own currency, first what is inflation? It is the increase in the general level of prices in the economy, and why this is because the more money circulates in the economy plus income will have people which generate that prices are increasing, the more people win a value morehigh will have the products. For example we have Germany at the beginning of 1920 the government began to issue much more money monthly and in turn prices tripled every month being a clear example of inflation for the world.
- In the short term there is a dilemma between inflation and unemployment
As a tenth principle we have that society in the short term faces a dilemma between inflation and unemployment, as we had already mentioned before inflation is about because the government by printing too much money makes prices upload, therefore, when thatIt happens to the producer, it is more profitableunpredictable of economic activity, measuring according to the production of goods and services or the number of people employed.
conclusion
We can conclude that each concept seen from the ten principles of economics at any time of our lives have applied it either when making decisions, in knowing what is the cost of choosing one thing instead of the other, which encourages usTo be more efficient and productive and as much as the government does its part for the correct management and distribution of goods for society that are scarce, concepts that will serve the future for every good economist, as Mankiw said in his book, “StudyEconomy will help us understand and understand the world in which I live.
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