Basic Principles of the Economy

The economy is based on the principle of scarcity, because resources are scarce and unlimited. Similarly there are the 6 basic principles of the economy that we enunciate below. The first four is within the decisions that men make. The following three principles frame how individuals interact. And the last three principles reflect the functioning of the economy as a whole.

First principle: individuals face dilemmas

to get what we like; we usually have to give up something else that we also like. Making decisions is choosing between two objectives.

When individuals are grouped into societies, they face different types of dilemmas. The classic one is the dilemma between “cannons and butter”. The more we spend on national defense to protect our coasts from foreign aggressors (cannons), the less we can spend on personal assets to improve the standard of living of our country (butter).

Society also faces a dilemma between efficiency and equity. Efficiency means that society is making the most of its scarce resources. Equity means that it is equitably distributing the benefits of those resources among its members. In other words, efficiency refers to the size of the economic pie and equity in how it is distributed.

When the State distributes the income of the rich in favor of the poor, it reduces the retribution that is obtained when working hard, so that individuals work less and produce less goods and services.

It is important to recognize the dilemmas that exist in life because individuals will probably only make good decisions if they understand what option they have.

Second principle: the cost of a thing is that which is waived to get it

as individuals face dilemmas, to make decisions they must compare the costs and benefits of the different possible courses of action. Many decisions that are made in life require making small additional adjustments in an action plan that already existed. Economists call them marginal changes. In many situations, individuals make the best possible decisions thinking in marginal terms. The fundamental role played by incentives in the determination of behavior is important for the measures to be taken by public authorities. These usually alter

Third principle: rational people think in marginal terms

A person makes a rational decision if and only if the marginal benefit is higher than the marginal cost.

Fourth principle: individuals respond to incentives

As individuals make decisions by comparing costs and benefits, their behavior can change when costs or benefits change

Fifth principle: trade can improve the welfare of the whole world

The costs or benefits of private actions, when public authorities do not take into account the way in which behavior could change as a consequence, their measures can produce effects that they did not intend. If the measure alters the incentives, it will lead the individuals to change their behavior.

Sixth principle: markets usually constitute a good mechanism for organizing economic activity

Central planning was based on the theory that government was the only one that could organize economic activity in a way that promoted the economic well-being of the country as a whole. The economist Adam Smith

When we talk about competition between countries from the economic point of view, it is not a competition in which one of the countries loses and the other wins, but it is a competition in which the countries win, since that competition promotes trade between them and with the welfare of its citizens.

In the field of economics there is no more welfare isolated, but relating to others. To learn more about such economics related topics, you need to visit BusinessStudyNotes Business Study Notes is all about BBA, Mba, and & related studies and notes online. We may also say that the students of MBA, BBA, and & may easily get ready for their exams through business study notes.