10 basic principles I was taught…

How People Make Decisions
1. People Face Tradeoffs.
To get one thing, you have to give up something else. Making decisions requires trading
off one goal against another.

2. The Cost of Something is What You Give Up to Get It.
Decision-makers have to consider both the obvious and implicit costs of their actions.

3. Rational People Think at the Margin.
A rational decision-maker takes action if and only if the marginal benefit of the action
exceeds the marginal cost.

4. People Respond to Incentives.
Behavior changes when costs or benefits change.

How the Economy works as a whole
5. Trade Can Make Everyone Better Off.
Trade allows each person to specialize in the activities he or she does best. By trading
with others, people can buy a greater variety of goods or services.

6. Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they are guided by an
“invisible hand” that leads the market to allocate resources efficiently. The opposite of this
is economic activity that is organized by a central planner within the government.

7. Governments Can Sometimes Improve Market Outcomes.
When a market fails to allocate resources efficiently, the government can change the
outcome through public policy. Examples are regulations against monopolies and pollution.

How People Interact
8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time
enjoy a high standard of living. Similarly, as a nation’s productivity grows, so does its
average income.

9. Prices Rise When the Government Prints Too Much Money.
When a government creates large quantities of the nation’s money, the value of the money
falls. As a result, prices increase, requiring more of the same money to buy goods and

10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.
Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial
for understanding the short-run effects of changes in taxes,government spending and
monetary policy.

Nothing ever is so simple πŸ™‚


Posted on January 18, 2005, in Uncategorized. Bookmark the permalink. 2 Comments.

  1. Integral to ‘How People Make Decisions’ is the value to one self, of the end /good towards which the decision making process is directed.

    (Some things maybe invaluable with no means to calculate the costs involved. It’s on similar grounds that the utilitarian calculus fails.)

    • Agree.

      The behaviourial economists will say – the problem is with the model, we just need to fill in a few more parameters and voila, there’s a model that explains things better!! πŸ™‚

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