Four principles of economics guide how individuals make decisions and they include the following. First, people face tradeoffs.  Individuals face tradeoffs because there is nothing that is free and therefore, for individuals to get what they like, they will have to give up another thing that they like. Second, the cost of something is what you give up to get it (Mankiw, 2014). It is important if people compare the costs and benefits of alternative courses of action. Similarly, the decision makers should consider the opportunity cost. Third, rational people think at the margin. Such people make decisions when the marginal benefits exceed the marginal costs. Fourth, people respond to incentives. They respond to incentive based on the outcome of benefits after comparing them to costs. Similarly, people’s behavior may change due to the change in incentives.

Three principles of economics guide how people interact in the market and they include the following. First, trade can make everyone better off (Mankiw, 2014). Second, markets are usually away to organize economic activity. Third, the government can sometimes improve market outcomes. Trade can make everyone better off because it gives an opportunity to people or countries to specialize in their area and enjoy the different goods and services provided. Markets are usually away to organize economic activity because the invisible hand that guides people’s interest will promote the economy of the society by producing a desirable outcome. The government can sometimes improve market outcome by taking advantage of the market failure (Mankiw, 2014). The government can intervene in the case of an externality, and when the market fails to allocate resources efficiently.

Lastly, three principles of economics guide how the economy as a whole works and they include the following. First, a country’s standard of living depends on its ability to produce goods and services (Mankiw, 2014). The nation’s ability to produce goods and service depends on the educational level and experience of the workers. Similarly, the productivity of the country will improve if the necessary technology is used. Second, prices rise when the government prints too much money. When the government through the central bank of a country increases amount of money in circulation, its value falls and this causes inflation. Third, the society faces a short-run tradeoff between inflation and unemployment.  Since the relationship between inflation and unemployment is temporary, the policymakers can use the various policy instruments to exploit the trade-off.

Reference

Mankiw, N. G. R. E. G. O. R. Y. (2014). Principles of macroeconomics. Cengage Learning.

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