Principles of Economics

Economics is often called the dismal science. Originally, the term was applied derisively, by Thomas Carlyle, but has come to represent the ways in which basic economic principles are applied to all people, regardless of status. Since then, the study and scope of economics has expanded greatly, leading to the development of several principles of economics that can be applied to the whole of society.

One of the best outlines of economics was proposed by Gregory Mankiw in his appropriately-titled text Principles of Economics. In that now-standard work, Mankiw identified ten basic principles. The first is that people face tradeoffs. In other words, in order to gain something, we must give up something else. The second is that the cost of something is what you give up in order to acquire it. This is known as opportunity cost. Third, rational people think at the margin. Economists assume that people engage in rational decision making, comparing costs and benefits. Fourth, all people will respond to incentives. These four principles all involve how people make decisions.

Numbers five through seven of Mankiw's principles of economics involve how people interact with one another. Five states that trade can make everyone better off. Six states that the market is an excellent way or organizing economic activity, and seven states that the government can occasionally improve market outcomes. The final grouping, eight through ten, involve the principles of economics of the force and trends that effect the whole of the economy. Eight states that the standard of living depends upon a country's production, nine declares that prices rise when the government prints too much money, and ten states that there is short-run trade off between inflation and unemployment.