Introduction
A household, a society, and an economy are all faced with certain decisions. Since human beings form a part of the groupings, they make key resolutions on behalf of the community. The conclusions that I make are important because of the scarcity of resources. Resolutions that I make must then conform to the economic guidelines. The principles of economics are vital for me because they apply to my real-life economic situation and decisions.
The Ten Economic Principles
One of the basic economic principles stipulates that people face trade-offs. Decision-making requires trading off one goal for another one (Mankiw, 2020). It means that to acquire something valuable I must also surrender another precious thing for me to properly allocate my fixed salary to different needs. Nonetheless, a good decision is only made when I have a clear understanding of available options and forgo all the benefits of one choice.
An economic principle postulates that the cost of something is actually what is given up to get that particular commodity. I must weigh the possibilities of saving a portion of breakfast money for other uses or saving the whole of it. According to Mankiw (2020), opportunity cost is defined as “the cost of an item that is given up to get that item” (p. 4). Still, in this case, the cost of an action may not be as obvious as it first appears to me.
Furthermore, economists hypothesize that rational individuals think at the margin. Reasonable individuals consistently and intentionally do their best to achieve their goals given the accessible opportunities (Mankiw, 2020). If fuel, milk, and cocoa prices are increased and at the same time there is no salary increment, I have to decrease the expenditure on breakfast and transfer the amounts of money to transport. Therefore, modifications to two parameters do not cause any change in the total salary.
Moreover, people are known to respond to incentives because they make decisions based on the costs and benefits. When examining any policy, I should not only emphasize the direct effects but also the less indirect outcomes of the incentives (Mankiw, 2020). For instance, if the state chooses to increase the price of petroleum products, of course, public transport costs escalate, and therefore my fare to work increases, consequently, I have to reduce breakfast expenditure. If a policy transforms an incentive, it also causes individuals to alter their behaviors.
An economic principle posits that trade can make everyone better off. It is very easy to be misled when one thinks of trade that exists between two individuals because commercial activities are viewed as a competition affair (Mankiw, 2020). Whether I increase my expenditure on breakfast or transport, both decisions will automatically better my life and those of my trade partners. Therefore, trading activities benefit both the sellers and the buyers because they either acquire monetary benefits or satisfaction.
Markets are usually an efficient way of organizing economic ventures. In a market economy, the resolutions of the main planner are always replaced by the decisions of other numerous economic ventures and households (Mankiw, 2020). As an individual, I decide which transport company I would like to use every morning to work. Similarly, I choose what beverage company I would like to buy from. Certainly, I am not concerned with the well-being of the companies I buy from, except for the fact that their products can satisfy my needs.
In an economy, governments are important as they can ameliorate market outcomes. Most importantly, individuals can own and control scarce resources if only the institutions can enforce property rights policies (Mankiw, 2020). The absence of government regulations in the transport industry may result in hiked bus fares and traffic congestion. In this case, I can decide to acquire a small car to avoid escalating transport costs and traffic jams.
A nation’s standard of living is dependent on its production ability. The disparities in living standards between states are quite evident. Nonetheless, the explanation for the existence of such differences lies in the production gap between states (Mankiw, 2020). It means that if I migrate to a poorer state, my expenditure will also reduce in terms of transport and breakfast expenses.
There is an effect on the economy when the government prints excessive money because the prices rise. Economists define the outcome as inflation, which is a situation characterized by a persistent increase in overall prices in an economy (Mankiw, 2020). With a lot of money in circulation, my budget needs also increase, and at a fixed salary, I might scrap the budgetary allocation for breakfast only. The large amounts of money that are created by the state, devalue the existing currency.
Economists agree that society faces a temporary trade-off between inflation and unemployment. The existence of large amounts of money in circulation ignites spending and increases demand for goods and services (Mankiw, 2020). Unemployment is reduced because firms hire many workers to cater to the increased production needs (Mankiw, 2020). Therefore, I do not need to cut my expenditure on breakfast or transport but to increase them accordingly.
Conclusion
In summary, the fundamental truths of economics are important as they are appropriate in real-life economic situations and options. I face a trade-off in making useful decisions regarding economic situations by considering the opportunity costs that are attached to each available option. Again, if I think at the margin I should also be driven by incentives and that is why my behaviors have to conform to given policies. Therefore, the economic principles are fundamental to the economic choices I make every day.
Reference
Mankiw, N. (2020). Principles of economics (9th ed.). Cengage Learning.