Learning economics gives people a better understanding of the economic and financial realities around them, improving their ability to save, invest, produce, consume, and even vote. These key principles are true to all areas of economics, but could be applied uniquely, depending on the specific circumstances.
Here are the six basic principles of economics:
1. Scarcity compels people to choose.
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Economists emphasize that scarcity is given in the world we live in. With this, they mean that available useful resources will never be sufficient for people’s desires and necessities. Therefore, they must always choose among competing options. For example, they should decide is they have to save some of their scarce income or spend it all.
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2. All choices come with an opportunity cost.
Every time a decision is made by a saver, consumer, investor or producer makes a decision, there is always another option to consider. Economists call the forgone alternative the opportunity cost of a decision. In decision-making, the value of the opportunity cost should be taken into account. To illustrate, when a person decides to save $100 of his after-tax income, he is giving up goods and services worth that amount, and that is the opportunity cost of his decision to save.
3. The response of people to incentives is predictable.
An incentive is something that affects the choices people make. If there’s a change in incentives, people’s actions are also likely to change in predictable ways. A hike in real interest rates, for example, comes with the incentive to save more and spend less.
4. Market forces and economic systems impact people’s choices.
People’s financial decisions are made from a certain perspective of an economic system.
In particular, the type of economic system – command, market, traditional or any combination – plays a huge part in the choices they make. As an example, people in a strict command economy, such as in North Korea, where majority of properties are government-owned and controlled, people do not have the liberty to make stock market investments.
5. People’s choices have both planned and unplanned consequences in the future.
According to economic experts, the costs and benefits of our decisions – intentional or unintentional – reveal themselves in the future, as this is the only time we can influence or affect. For example, a government may put a cap on gasoline prices to help consumers; however, this can lead to the unintended result of black markets, long lines at the pump, etc.
6. Voluntary trading among people offers gains.
Goods and services people need are not always produced by them. Sometimes, they make less products and services and then exchange them with others as a way to satisfy their economic desires or necessities. For example, when a person works for a company, the company gains from the work the person renders, and in turn, the person benefits from the wage or salary he receives.
Originally posted 2016-10-03 15:38:46.