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TEN PRINCIPLES OF
ECONOMICS
Chapter 1
1
Economics
Economics is a social science that studies how

people use resources, produce and consume goods
and services, and make decisions in the face of
scarcity
2
The word Economy . . .
 Comes from a Greek word for “one who manages a household.”
 Here are some questions that need answers
Who will work?

What goods and how many of them
should be produced?
What resources should be used in
their production?
At what price should the goods be
sold?
Who should get the goods
produced?
 We shall see the answers during this year 3
Scarcity . . .
 Scarcity is a key word to understand economics
 It means that society has less to offer than people wish to have
 Managing the resources of society is important because resources
are scarce
 Economics is the study of how society manages its scarce resources
How people make decisions

How people interact with each other
The forces and trends that affect the
economy as a whole
4
Ten Principles of Economics
 The first group of principles look at the individuals in the society
 Our aim is to understand how people make decisions of economic
nature
 We divide this group into four principles
1. People face tradeoffs

2. The cost of something is what
you give up to get it.
3. Rational people think at the
margin.
4. People respond to incentives.
5
Ten Principles of
Economics
 The second group of principles look at the interaction of individuals
in the society
 Our aim is to show the effects of the way people interact with one
another
5. Trade can make everyone
better off.
6. Markets are usually a good way
to organize economic activity.
7. Governments can sometimes
improve economic outcomes.
6
Ten Principles of Economics
 The third group of principles look at the behaviour of the whole
society
 What happens at the whole economy has an effect on individuals
and their interaction
 How the Economy as a Whole Works
8. The standard of living depends

on a country’s production
9. Prices rise when the government
prints too much money
10. Society faces a short-run
tradeoff between inflation and
unemployment
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1. People face tradeoffs
 To get one thing, we usually have to give up another thing
Guns vs. butter
Food vs. clothing
Leisure time vs. work
Efficiency vs. equity
 Efficiency means society gets the most it can from its scarce
resources.
 Equity means the benefits of those resources are distributed fairly
among the members of society.
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2. The cost of
something is what you

give up to get it.
Decisions require comparing costs and benefits of alternatives
College vs. work
Sleeping vs. sturdying
Cinema vs. football game
 Opportunity cost is what you give up to obtain some item
 The final real cost of everthing is its oportunity cost
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3. Rational people think at the
margin.
Marginal thinking plays a crucial role in economic actions
 By “marginal” we mean small changes to an existing plan of action
 The word “incremental” ise also used
 Individuals make decisions by comparing the costs and benefits at
the margin
 The last item therefore becomes very important
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4. People respond to


incentives.
Marginal changes in costs or benefits motivate people to respond
The decision to choose one alternative over another occurs when MB
> MC
MB = Marginal Benefits
MC = Marginal Costs
 When they realise that the incentives have changed, economic
actors take different decisions
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5. Trade can make everyone

better off
People gain from their ability to trade with one another
 If there is competition in trading, then every party gains from trade
 Trade allows people to specialize in what they do best
 Specialisation is the key to modern society
 And the high levels of income that modern societies enjoy
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6. Markets are usually a good way
to organize economic activity.
 Specialisation requires the exchange of products of specialised
producers
 One way of doing it is caled the market economy
 In a market economy
Households decide what to buy and

who to work for
Firms decide who to hire and what to
produce
 Households and firms interact is as if guided by an “invisible hand”
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7. Governments can sometimes
improve market outcomes.
 If markets fail (break down), government can intervene to promote
efficiency and equity
 Market failure occurs when the market can not allocate resources
efficiently
 Market failure may be caused by an externality, which is the impact
of one person or firm’s actions on the well-being of a bystander
 Market failure may also be caused by market power, which is the
ability of a single person or firm to unduly influence market prices
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8. The standard of living
depends on a country’s
 production.
Standard of living may be measured in different ways:
By comparing personal incomes
By comparing the total market value
of a nation’s production
 Almost all variations in living standards are explained by differences in
the productivity level of different countries
 Productivity is the amount of goods and services produced from each
hour of a worker’s time
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9. Prices rise when the
government prints too much


money.
Inflation is an increase in the overall level of prices in the economy
Some countries in some periods have high levels of inflation
 Turkey has the highest inflation among comparable countries in the
world
 Usually the growth in the quantity of money is the major cause of
inflation
 In other words inflation happens becaure government prints too much
money
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10. Society faces a short-run
tradeoff between inflation and
 unemployment.
For many economies there exist a strong relation between the
change in the level of unemployment and change in inflation
 The Phillips Curve summarises the relation
Inflation  Unemployment
 It’s a short-run tradeoff that applies to normal situations
 Higher inflation becomes the opportunity cost of lower inflation
 At other times the relationship may break down
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Conclusion
 When individuals make decisions, they face tradeoffs
 Rational people make decisions by comparing marginal costs and
marginal benefits
 People can benefit by trading with each other.
 Markets are usually a good way of coordinating trades
 Government can potentially improve market outcomes
 Inflation results from increases in the quantity of money
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TEN PRINCIPLES OF

Economics is a social science that studies how

Who will work?

How people make decisions

1. People face tradeoffs

8. The standard of living depends

Households decide what to buy and

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