Four most important principles of economics

FOUR MOST IMPORTANT PRINCIPLES OF ECONOMICS.

Gregory Mankiw in his principles of economics outlines Ten principles of economics but four are the most important one, they are:

1) People face trade-offs

2) The cost of something is what you give up to get it.

3) Rational people think at the margin

                                        

4) People respond to incentive

EXPLANATIONS OF THESE PRINCIPLES 

• PEOPLE FACE TRADE OFF --  The word"people face tradeoff"means "there is no such things as a free lunch!" Or to get one thing,we usually have to give up another thing.
    

• THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT-- Because people face tradeoffs,making decisions requires comparing the costs and benefits of alternative courses of action. The opportunity cost of an item is what we give up to that item.
  
• RATIONAL RESPOND TO INCENTIVES--Rational people often make decisions by comparing marginal benefits and marginal cost. A rational decision maker takes an action only if marginal benefit exceeds the marginal cost.
            
• PEOPLE RESPOND TO INCENTIVES--An incentive is something that induces a person to act. Because rational people make decisions by comparing costs and benefits,they respond to incentives. Incentives are crucial to analyse how market works.