Ten Key Principles of Economics

1. Everything has a cost. There is no free lunch. There is always a trade-off.
2. Cost is what you give up to get something. In particular, opportunity cost is cost of the tradeoff.
3. One More. Rational people make decisions on the basis of the cost of one more unit (of consumption, of investment, of labor hour, etc.).
4. Incentives work. People respond to incentives.
5. Open for trade. Trade can make all parties better off.
6. Markets Rock! Usually, markets are the best way to allocate scarce resources between producers and consumers.
7. Intervention in free markets is sometimes needed. (But watch out for the law of unintended effects!)
8. Concentrate on productivity. A country’s standard of living depends on how productive its economy is.
9. Sloshing in money leads to higher prices. Inflation is caused by excessive money supply.!!
10. Caution: In the short run, falling prices may lead to unemployment, and rising employment may lead to inflation.



Friday, July 16, 2010

Markets Interact


One of the most difficult concepts for students to grasp is the chain reaction that occurs throughout an economy when the interdependence becomes evident. This article is a terrific example of the impact the Gulf disaster is having on markets thousands of miles from its shores. People who never had a clue there was a connection are discovering the extensive reach of this calamity. According to the journalist, it all starts with the simple oyster. The impact on the cullers, captains, and shuckers is obvious but what of the fate of workers in the burlap bag factories in Mississippi? In Minnesota, oyster shells are ground to produce an ingredient in chicken feed. The restaurants in New York, Los Angeles, and Las Vegas are having to strike the delicacies from their menus.

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