The Seven Core Principles of Economics

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Economics is the social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems. All economists agree on one thing, the economy is large and it is unpredictable. However, throughout the years economists have developed some simple but widely applicable principles that are useful when trying to understand decisions that are made by everyday people to the workings of highly complex markets. There are Seven Core Principles of Economics. These principles are: Scarcity Principle, Cost-Benefit Principle, Principle of Unequal Costs, Principle of Comparative Advantage, Principle of Increasing Opportunity Cost, Equilibrium Principle, and Efficiency Principle. Being familiar with these seven core principles is vital in your understanding on how economics operates.

Scarcity PrincipleThe Scarcity Principle basically states having one good thing usually means having less of another. It is one of the most basic principles of economics. Although we have boundless needs and wants, the resources available to us are limited, there's just not enough good to go around. It basically states that there is a cost to consumption, people have unlimited wants but we have limited resources. If not for scarcity, then, there would be no need to concern ourselves with how best to manage resources. Everyone is faced with everyday decisions that involve scarcity. It doesn't matter if you are Bill Gates or a homeless man living on the streets. When we make decisions about anything, scarcity is usually taken into consideration whether we realize it or not. Gates has enough money to buy more houses, cars, boats, vacations, and basically any consumer good he wants but there will always be only twenty-four hours in a day. For Bill Gates time is most scarce for him.

In economic reasoning, scarcity is a relative concept, not an absolute one. When most people think of scarcity they usually think it means not abundant. However, in economics something is scarce when it has more than one valuable use. It is obvious to a thirsty person lost in the desert that water is scarce. But water that appears plentiful in a large lake or river is scarce nonetheless because it has many different uses including crop irrigation, the production of electricity, a venue for shipping lanes, fish habitat, and many forms of recreation. Even though there is plenty of water the many alternative uses of it makes it scarce. Another example of scarcity would be Petroleum in Japan, a country without its own oil fields and without oil reserves. Petroleum is considered scarce because it has many valuable uses in Japan. But what about petroleum in Saudi Arabia? Saudi Arabia is a country with many oil fields and oil reserves. Petroleum is still considered scarce because it still has many valuable uses in Saudi Arabia, and it can be sold to other people in other countries so it has several valuable uses making it scarce. Scarcity can be a powerful thing. It can force you to make difficult choices. It can force you to go without. It can force you to pay more than you wanted to. It can force you to look elsewhere for the thing you want. The next time you discover that something you want isn't available, remember the idea of scarcity.

Cost-Benefit PrincipleThe Cost-Benefit Principle is taking no action unless its marginal benefit is at least as great as its marginal cost. Marginal benefit is the increase in total benefit that results from carrying out one additional unit of the activity. Marginal cost is the increase in total cost that results from carrying out one additional unit of activity. A cost is what you give up when you decide to do something and a benefit is something that satisfies your wants. Basically The Cost-Benefit Principle states an individual, firm, or a society should take an action if, and only if, the extra benefits from taking the action are at least as great as the...
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