The Ten Principles of Nature of Economics - Term Paper Example

The Ten Principles of Economics Introduction: Economics is a to know how an economy can efficiently utilize scare resources. It is a normative and social science. A normative science helps to identify the performance of an economy with its value judgment power. The production, consumption, choice of consumer and their behavior, finance, trade, development and statistical analysis are the main parts of this subject. Moreover, Economics is a humanitarian science that follows the recent behavioral aspects of consumers and producers. The changes in supply, demand and price are the effects of the scarcity in resources. Economics can state the present market condition and compare it with the past periods. The ‘invisible hand’ of market helps to back into the new equilibrium point after proper adjustment of supply and demand. Economics is divided into two halves, namely, Microeconomics and Macroeconomics to analyze its small and large aspects respectively for national and international levels (Duffy). Microeconomics analyzes the individual market mechanism, consumer behavior, demand and supply changes, change in equilibrium point, moral hazards and utility maximization of a consumer. Macroeconomics analyzes the market system for a whole economy or international market mechanism. Economic policies play a vital role in case of Macroeconomic aspects. These policies are implemented and controlled by the government of the economy (Mankiw and Taylor). All these economic aspects are dependent on the principles of economics. Ten Principles of Economics: Greg Mankiw and Mark Taylor proposed ten principles of economics. They explained these principles and its effects from the consumer’s point of view (Staff). These principles provide perfect understanding of Economics. Though these principles were written on the basis of U.K. and European market and economic structures, these were accepted internationally (Staff). They used many case studies to show the practical effects of the implementation of these principles in U.K. and Europe. These principles touched almost all the aspects of Macroeconomic theories to explain the long-run economic activities. These principles characterized the changes in the European economic structure (Staff). These principles are stated below, 1. People face trade-offs 2. People think about the opportunity cost 3. Rational consumers and producers think at the margin 4. People respond to incentives 5. Trade and competition improves the market economy 6. Market is the best field of economic activity organization 7. Government has the power to improve the market conditions 8. Standard of living depends on the production 9. People faces the effects of inflation 10. Trade-off between inflation and unemployment affects society People Face Trade-Offs: Depending on fixed amount of disposable income and propensity to consume, people have to forego some goods to buy any other goods or services. There is a perfect mechanism of trading-off in the market. Currencies of different countries are the main medium of exchange of those respective countries. Sometimes, people go for the direct exchange within two goods or services. As people belong to different groups, they go through different types of trade-offs in the market. There is a term as ‘guns and butter’ (Mankiw and Taylor, 34) to represent the trade-off between the total spending of money on the national defence and the consumption of the necessary consumer goods. If the government is spending more wealth on national defence, then the people of that economy have to forego some part of their disposable income and reduce the consumption of necessary goods. The trade-off between the level of income and environment is the most important trade-off for the present and future time (Mankiw and Taylor). According to the ‘Environmental Kuznet’s Curve’ (Cleveland, Stern and Costanza, 193), there is a relationship between the environmental deprivation and the income level of people. In the initial stage, as the level of income increases, the environmental degradation will increase. After a certain time period, there will be a change in production mechanism that will help producers to reduce the environmental degradation. Therefore, after that particular period, there will be a negative correlation between the increase in income level and the environmental degradation. All these trade-offs are very important topics in Economics. Opportunity Cost: To consume a good or services, one has to forego some amount of any other goods or services. The amount of foregone goods or services will be the opportunity cost of the consumed goods or services (Mankiw and Taylor). When a consumer goes to consume some items, he should be aware of the opportunity cost factor. He should consume goods with lower opportunity cost. Rational People Thinks at the Margin: Sometimes people can not decide what should they consume. The small changes or adjustments in any plan of action are known as ‘marginal changes’ (Mankiw and Taylor, 6). People can choose the best option at the margin. Even a firm can think better and go for the better option at the margin. A rational consumer or producer always compares the outcomes of different options available to them. This work will be lot easier at the margin. People will go for the goods and services, if the marginal benefit is more than the marginal cost (Mankiw and Taylor). So, they have to think carefully to choose the commodity with lower opportunity cost. People Responds to Incentives: Any kind of incentives can change the cost and benefits of the consumer and producer. Therefore, the cost-benefit analysis should be changed according to the new cost and benefits. This implies that the market and people both are very responsive with the incentives. If the price of a commodity increases, people will quickly change their consumer behavior and will shift to another alternative or substitute commodity (Mankiw and Taylor). To maintain their budget constraint, they have to change their allocation of spending on different goods. The economic policy maker should always keep in mind about the effects of incentives on the cost and benefits of the people because this will change the consumer behavior completely. The failure of policy makers to find out the effects of incentives will give an unexpected result from the market. Competitive Market: People always face a tough competition in the market. Recently, the biggest competition is in job market (Mankiw and Taylor). People face competition in both for buying and selling goods. There is no presence of perfectly competitive market but people face competition in oligopolistic and monopolistic competitive market. Though it is very tough to compete with others, it helps to be better off. Development within the consumer side is very necessary to bring changes in the production procedure and changes in consumer behavior. This increases the power of market auction. Organization of Economic Activity: At present, most of the countries are trying to set up market economies with different market mechanisms. Market economy has the power to distribute resources of firms and households. Market economy follows the decentralized decisions of an economy (Mankiw and Taylor). There is no power for central planners to control the market mechanism. Firms can conduct the process of recruitment and people can consume according to their choices because there is no involvement of central planners. People are more involved in making themselves better off. Though they do not bother about the economic welfare, market economy has shown a great success in organizing economic activity. Effects of Government on Market Outcomes: After a change in supply, demand or in price, market can get its equilibrium point in a new place by the effect of the ‘invisible hands’ (Mankiw and Taylor, 10) of the economy. Still, there is a need of the government to protect the efficiency and effectiveness of the ‘invisible hands’ of the economy. People want security from the government. The involvement of the government in market economy is very necessary to bring efficiency and equity in the market. Sometimes, the ‘invisible hands’ may fail in market economy. At that time, the government has to play a vital role to maintain the market economy at its equilibrium state. Standard of Living: The standard of living can be identified by the total production and its quality of the economy (Mankiw and Taylor). If the production is high, one can predict that there is a big demand for the produced goods from the consumer side. This means that the people are having more disposable incomes in their hands. If people have more disposable income in hand, then from this we can say that the standard of living is high. Therefore, the total production of an economy is factor to measure the standard of living. Concluding remarks The growth in printing money is the main reason for the inflation in an economy. As the amount of money increases in a nation, the value of the money will go down (Mankiw and Taylor). As a result of this, consumers have to spend more money to consume the same thing as before. The increment in the quantity of money leads to raise the price of the commodity. Primarily, it seems to be a negative impact on the economy but it helps to improve the standard of living of people. Unemployment is a result of inflation in an economy. Phillips curve illustrates the trade-offs between inflation and unemployment. It is important for development economics and the business cycle of an economy (Mankiw and Taylor). It shows a negative correlation between inflation and unemployment (Llauudes and Ricardo). Therefore, increasing rate of money in an economy reduces the level of unemployment through increase in more job opportunity in the economy. Works cited 1. Mankiw, Gregory, Taylor, Mark P., Economics. Cengage Learning EMEA, 2006. 2. Staff, Katie Thorn. Business and Economics Cat 2005/06. Cengage Learning EMEA, 2005. 3. Duffy, John. Economics. John Wiley and Sons, 1993. 4. Cleveland, Culter J., Stern, David I. And Robert Costanza. The Economics of Nature and the Nature of Economics. Edward Elgar Publishing, 2001. 5. Llauudes, Ricardo. The Phillips Curve and Long-Term Unemployment. February, 2005. European Central Bank. Read More