Principles of Economics

Economics is a social science whose object of study is the way in which limited resources are managed to satisfy unlimited needs. Thus, this science also studies the behaviour of society, as well as the actions carried out by individuals themselves.

Economics, like any other science, is based on a set of principles. Many authors have been highly critical of this set of principles. However, those defined by the economist Gregory Mankiw have so far been the most widely accepted by academia.

The following are the ten most important principles on which the science of economics is based.

The 10 principles of economics

The principles on which economic science is based, according to the relationship established by Professor Gregory Mankiw, are the following:

1. All economic agents must face trade-offs and make decisions.

Given that there is a limitation of resources, as well as unlimited needs, agents must choose how to maximize and make efficient use of these resources.

2. Every decision involves an opportunity cost.

This refers to the fact that, when we make a decision, there is always a counterfactual scenario that we stop choosing when we choose the other. All in all, this decision involves a cost or a benefit.

3. Marginal analysis and rational thinking.

Economic agents base their decisions on marginal benefit and marginal cost. In this way, economic agents base their decisions on the benefits and costs of producing an additional unit.

4. Economic agents are motivated by incentives.

All economic agents base their actions and behavior on rewards known as incentives.

5. Trade as welfare-enhancing.

This principle refers to the fact that trade ultimately results in an improvement in welfare, since more goods and services are produced which, directly or indirectly, offer us a greater variety of resources.

6. Markets organize economic activity efficiently.

This refers to the fact that, as Adam Smith said, the market is the best existing control of the economy. However, many economists argue that the market suffers from distortions, or what is known as «market failure». For this reason, they advocate the intervention of the State to correct such failures.

7. Governments can improve welfare through the rule of law, improving equity, and promoting efficiency.

A series of economic policies should be adopted that seek to promote greater equity.

8. The standard of living of a country’s citizens depends on its capacity to produce goods and services.

In this sense, the more a country produces, the more its level of economic growth increases. Thus, it is understood that the greater the growth, the greater the resources and, consequently, the greater the welfare.

9. Prices soar with the increase in monetary mass and fiscal deficit.

In this sense, it refers to the fact that printing more money produces inflation, just as a high fiscal deficit does.

10. In the short term, full employment and moderate inflation are opposite decisions.

This refers to the fact that, on many occasions, policies adopted by the government to promote employment end up generating inflation. For this reason, both elements cannot be present simultaneously.

Other economic principles

In addition to those mentioned above, many other economists have tried to define another series of principles that, although not included, are highly popular.

Among these concepts, we could highlight the following:

State intervention does not always correct distortions.

This refers to the fact that, just as there are market failures, there are also «state failures». These occur after the application of poor decisions, which have a negative impact on the economy.

Excessive debt reduces growth.

This principle refers to the fact that a high level of leverage ultimately has direct effects on the economy. On the one hand, by limiting its ability to implement monetary and fiscal policies that encourage economic growth. On the other hand, the cost of debt compromises public accounts, as well as the income of citizens.