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Principles Of Economics And Business Lifecycle

Economy is a word that comes from a Greek word Oikonomos which means “one who manages a household” (Mankiw, 2008 pg 3).Which is defined as the study of how society manages its scarce resources. He also said that resources in the society are allotted “Not by an all-powerful dictator but through the combined actions of millions of household firms”. Hence economists are individuals that not only study on how people make there decisions: on how much they work, buy, save and make investments on what they have( Mankiw, 2008 pg 4).For example they do examine how a multitude of buyer and sellers of goods do determine the price at which a good is sold and the quantity at which it is being sold, but also they do analyses force and trends that do affect the economy as a whole , including the growth in average income and the fraction of the population that cannot find work to do as well as the rate at which price are increasing. While Principles of Economics, is defined as the basic methods and concepts that economists use when doing their economics, and economic analysis. Here the term “economics” refers to the discipline, not to the economy (Slembeck, 2001). This paper will discuss and analyze the ten principles of economics.

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The Ten Principles of Economics

It is said that there is no mystery in to what economic means, it does not matter which state or nation the economy discussion is all about, an economy is just a group of individuals dealing with each other a bout their lives (Mankiw, 2008 pg 3).Trade offs are faced by people. This is the first economic Principle which entails decision making. For one to make a decision about something he/she has to trade off one goal against the other (Mankiw, 2008).According to Mankiw he stated that the classical trade-off between “gun and butter”. The more a society spends on national defense (gun) to protect its shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home.” A second form of trade-off is between a “clean environment and high level of income.” important modern society face this. If a law in a state or a nation requires firms to reduce pollution, this does cause the rise in cost of production of goods and services (Mankiw, 2008).As much of this pollution regulation benefits from a clean environment and boost health status that come with it, they do reduce income cost of firm’s owners ,employees and customers. Efficiency and equality is the third trade-off. Efficiency means that the society i getting its maximum benefit from the scarce resources. While equality means that “Those benefits are distributed uniformly among the society’s members.” Economic pie is another word that means efficiency and manner at which that pie is divided into small slices is the equality. When this pie is divided by the government more equally it gets smaller thus reducing efficiency.

The second principle of economy is the cost of something is what you give up to get it (Mankiw, 2008). As we face trade-offs, decision we are bound to make should be based on comparing costs and benefits that come with alternative cause of action. For example, in our current society most students give up the earning and attend school which is their largest single cost of their education. An item that one gives up to get the other is referred to as opportunity cost. Therefore decision making should be based on opportunity cost that does a company each possible action.

The third principle of economics is that rational people think at the margin. Individuals that do have systematic and purposefully thoughts and employ their best to achieve their objectives line with a given opportunity are rational. They are aware that decisions in life are rarely black and white but do involve shades of gray (Mankiw, 2008). According to Mankiw in his book “Principle of Economic” he said that economics do use marginal term to describe small incremental adjustments to a plan of action. This is what rational individual use in making decision by comparing marginal benefit and marginal costs. This decisions can be used as a tool to explain otherwise puzzling economic phenomena. For example people do will to pay for a good based on the marginal benefits that come with it. People can spend extra a mount on diamond but not on a cup of water. Basically rational decision makers base their decision on, only if marginal benefits of action exceed the marginal costs (Mankiw, 2008).

The fourth Principle is People responding to incentives. “An incentive is something that induces a person to act such as a prospect of a punishment or a reward” (Mankiw, 2008). Cost and benefits is what rational individual compare to make a decision which respond to incentives. Incentives are used in analyzing how the market works. Mankiw suggested that policy makers should consider incentives as they make policies. For example a seat belt law does affect auto safety; here the rational individual did compare the marginal benefit from safer driving to marginal cost. Any policy analysis “must consider not only the direct effects but also the less obvious indirect effect” (Mankiw, 2008).

The fifth principle is that trade can make everyone better off. “Trade between countries can make each country better off” (Mankiw, 2008). Competition is a healthy factor in life. Families do compete for job search and shopping as well, while countries do compete to trade from each other. There is a benefit when we do employ our ability trade from each other. This allows countries to not only specialize in what they can do and deliver the best but also have a large and wide variety of goods and services the can trade with other countries. This further enhances close relation and sharing of skills and knowledge.

Markets are usually a good to organize economic activity is the sixth principle of economy. Mankiw stated in his book principle of economics that, “The collapse in Soviet Union and Eastern Europe in the 1980s made the most important change in the world during the half past century.”At that time most countries did had a central planned economy that did allot resources centrally but this is continually fading after its collapse and is, being replaced by the market economy. Market economy ‘Is an economy that allots recourses through decentralization of many firms and households as they inter-act in market for goods and services” (Mankiw, 2008).Its success is puzzling. Here no one looks at economic well-being of a society as a whole but rather free market contains many buyer and sellers as well as numerous goods and services and this bases on their own well being. According to Mankiw Prices are invisible hands that do direct economic activity. In a market buyers do look at the prices of goods and their by determine how much they demand, while the sellers look at the market price hence determine how much they can supply. With this decision both the buyer and the seller make, the market price therefore reflects both the value of a good to the society and the cost to the society for making the good (Mankiw, 2008).

A government can also improve the market outcome is another principle of economics. The government is essential because the invisible hand can work magic if and only if the government enforces laws which will rule and maintain the institutions that are pivoted to market economy. Property right is important to market economy and institutions. This does give individuals the power to own and control scarce recourses (Mankiw, 2008). In spite of this invisible hand being powerful it is not that omnipotent. The government needs to intervene in the economy and change the allocation of resources that individual would choose on their own. This will promote both efficiency and equality. The market may sometime fail to allot resources efficiently on its own and this is what is referred to as market failure by the economists. This maybe as a result of externalities which means “the impact of one person’s action on the well being of a bystander (Mankiw, 2008).The failure can also be as a result of market power which means”ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices”. This principle does not have a guarantee that the government can improve market out comes.

A country standard of living depends on it ability to produce goods and services, this is another principle of economics. The global living standard in this planet is staggering. Different countries a round the globe have different living standards. This is as a result of different productivity in different countries. Productivity is defined as “The quantity of goods and services from each unit of labor in put” (Mankiw, 2008). If employs produce large goods and services per unit of a time in a particular country then the people of the country do enjoy high, standard of living, while if productivity is low in a certain country the people do endure a more meager existence (Mankiw, 2008).Furthermore, the growth rate of nations productivity does not determine the growth rate of its average income. The relationship between productivity and living standards do have a profound implication for public policy. Policies should be set up with idea on how it will affect the ability to produce goods and services.

The other principle of economics is that Prices rise when government prints too much money. This therefore results to inflation which is defined as “an increase in the overall, level of prices in the economy.” Inflation causes economy problems for example when the overall prices levels of goods and services is doubled. This is a public enemy according to the president Gerald Ford (Mankiw, 2008).Inflation is caused by high persistence in the growth of quantity of money; this is as a result of government printing a large amount of money. This causes the value of money to fall. High inflation is always as a result of rapid growth in the quantity of money, and law inflation is as a result of slow growth in the quantity of money (Mankiw, 2008).

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Finally the last principle of economics is Society faces a short-run trade-off between inflation and unemployment. The primary effect in increasing the quantity of money is a s a result of high levels of in a long run, while short-run complex and controversial (Mankiw, 2008). The short-run is described as below.

“Increasing the amount of money in the economy stimulates the, overall level of spending and thus the demand of goods and services” (Mankiw, 2008).

“Higher demand may overtime cause firms to raise their prices, but in the mean time, it also encourages them to have more workers and produce a large quantity of goods and services” (Mankiw, 2008).

“More hiring means lower unemployment” (Mankiw, 2008).

This final principle plays a role in analyzing business cycle which means “fluctuation in the economic activity, such as employment and production” (Mankiw, 2008). Mankiw suggests that economists should “Exploit the short-run trade-off between inflation and unemployment using various economic instruments.” This can be achieved by changing amount that the government spends, taxes, prints and also influence the overall demand of goods an services. When demand changes it does influence the combination of inflation and unemployment which economy experience in short-run.


To conclude, Countries and nations should not ignore the need to help the poor since it does distort the incentive. Also Continues reading of economy will be of help for individuals to comprehend the marginal thinking. In addition, this will boost our knowledge to be involved in making judgments on the policies that the government set. Policy making is justifiable because it promotes efficiency or equality. Finally the government should have educated employees that will improve productivity of goods and services.


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