What is Economics?

Economics is the study of the society's behavior in making a choices, where they originate, how they are made, and what they mean to our society as a whole. The desires could not possible be satisfied. Therefore, people have to make a choices among competing desires. Generally, economics is facing the problem of "the resource allocation under condition of scarcity". Scarcity refer to the available resources are insufficient to satisfy the desires.

10 Principle of Economics

Principle 1 : People face trade-offs

• "There is no such thing as a free lunch". We usually have to give up other thing we like just want to get what we want. Making decision requires trading off of one thing against the rest. Consider after Dzul graduate with holding a Diploma of Business Studies, he want to decide whether to continue his study at University or to work. He has to choose the best alternative by given up the other alternative. If he decided to continue his study, he would give up to work as well as a salary in every month from working. The same thing will happen if he decided to work, he would give up to continue study at University as well as the return (like a high salary and a better job) in the future from the investment of studied at University and holding a bachelor.
  

Principle 2 : The Cost of Something is What You Give Up to Get It

• The matter of trade-offs do people face, making decision requires to compare the cost and benefits of alternative courses of action. Consider, for example, Dzul want to take a one day leave to spend his time with his dear. A day of his leave, he spend his time to hang out with his girlfriend. Thus, the time spending with his girlfriend has given up one day working time as well as one day salary. One day salary is the cost of his time to hang out with his girlfriend.
• The opportunity cost of a thing is what you give up to get that thing. To make any decision, the decision maker must concern about the opportunity cost that accompany each possible action.

Principle 3 : Rational People Think at the Margin

• Economist put people as a rational. The rational people generally do the best they can to achieve or get what they want, by given the opportunity cost they have. In the world of economy, we usually concern the situation where the firm try to make the best decision in deciding how many worker to hire and how much of their output to manufacture and sell it to maximize profits. Same as, the customers try to make the best decision in deciding the combination on what product or services want to buy and how much do they buy to achieve the highest possible level of satisfaction, subject to their incomes and the prices of those goods and services.
• Economics use the term of marginal changes to describe small incremental adjustment to an existing plan of action. Margin means "edge". The marginal changes are adjustment around the edge of what you are doing. Rational people often make decision by comparing marginal benefits and marginal costs.
• The marginal benefit depends on how many units an individual has. Consider, for example, water is plentiful. For every additional of a cup even a gallon of water, the marginal benefit of it is being small although the water consider as an essential good. Contras with a diamond where it is not really essential to survive in human life. The reason of the diamond is just a few compare to water, thus, for every additional of a diamond, the marginal benefit is being large.
• A rational decision maker takes an action if the marginal benefit of the action exceed the marginal cost.

Principle 4 : People Respond to Incentives

• An incentive is something such a reward or punishment that induces a person to act. The consequence of the rational people make decision by comparing the marginal cost and benefits, the respond to incentives.
  
• Consider, for example, Dzul is currently use the Digi prepaid for his cell phone number. He bought Digi prepaid because its incentive likes the low charge for every SMS send. One day, Celcom comes to UNIMAS and promote their product. One of their product is "University pack" which is the prepaid number where Celcom offer the low charge for every SMS and every minute calling in any number regardless Digi or Maxis. Dzul very interested to the offer and decide to change his phone number. Dzul make a decision to buy Celcom prepaid number because the incentives (reward) from that product.

Principle 5 : Trade can Make Every One Better Off

• Trade allows each person to specialize in the activities he does best. By trading with other, people can buy a greater variety of goods and services at lower cost. The principle of absolute advantage ( Advocate by Adam Smith) and comparative advantage (advocate by D.Ricardo) explain more detail about it.
  
• No nation exists in economic isolation.

Principle 6 : Market are Usually a Good Way to Organize Economic Activity

• Most countries that once had centrally planned economies have abandoned this system and are trying to develop market economies. In a market economy, the decisions of a central planner are replaced by the decisions of millions of firm and household. Firm decide whom to hire and what to make. Household decide which firms to work for and what to buy with their incomes. These firms and household interact in the marketplace, where prices and self-interest guide their decision.
• At first glance, the success of market economies is puzzling. After all, in a market economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and seller of numerous goods and service, and of them are interested primarily in their own well-being. Yet despite decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economics activity in a way that promote overall economic well-being.
  
• Adam Smith, in his book an "Inquiry into the nature and causes of the wealth of nations", said ; Households and firms interacting in market act as if they are guided by an "invisible hand" that leads them to desirable market outcomes.
  

Principle 7 : Governments can Sometimes Improve Market Outcomes

• The invisible hand only can work if the government enforces the rules and maintain the institutions that are key to a market economy.
• Government play the rule in promoting the efficiency and equity.

Principle 8 : A Country's Standard of Living Depends on Its Ability to Produce Goods and services

• Almost all variation in living standards is attributable to differences in countries' productivity that is, the amount of goods and services produced from each hour of worker's time. In nation where workers can produce a large quantity of goods and services per unit of time, most people enjoy a high standard of living in nation where workers are less productive, most people endure a more meager existence. Similarly, the growth rate of a nation's productivity determines the growth rate of its average income.

Principle 9 : Prices Rise When the Government Prints Too Much Money

• When Government print too much money, the value of money falls.

Principle 10 : Society Face a Short-Run Trade-off Between Inflation and Unemployment

Most economists describe the short-run effect of monetary injection as follow:

• Increasing the amount of money in the economy is driven by the overall spending on goods and services.
• Higher demand force the firm to increase the price, consequently increase the quantity supplied and hire more worker to produce those goods and service.
• The more hire worker, the lower unemployment.
  

Reference

N. Gregory Mankiw. Principles of Economics. 4^th ed. Thomson South-Western, US, 2007.