10 Economic Principles You Need To Know
In general, the notion of economic principles is a guide in economic activity to achieve a rational comparison between the sacrifices incurred and the results obtained. The principle of economics gives us several benefits, the first is to maximize profits where we get maximum results, and minimize losses at the smallest sacrifice. Economic principles apply in three economic activities, namely production, distribution, and consumption. There are 10 economic principles that are one of the foundations to be used in the application of economics.
Everybody Faces Trade Off
Nothing is free in this world. When you have to choose something, something else must be sacrificed. This sacrifice can be time, money, concentration, or whatever. A classic example is the tug of war between ‘guns and butter’ (gun and butter). The greater the expenditure of the state / government to build defense (weapons), the less resources are left to produce consumer goods (butter) to improve people’s living standards. Vice versa.
Sacrifice Cost for Getting Something
This is commonly referred to as opportunity cost which means opportunity cost. This opportunity will disappear and turn into one choice that you decide. Therefore you should take the opportunity with things that have comparable or more value.
People think rationally means that if someone determines a decision or choice, the person does it in a rational mind. A person will think rationally for the benefits and the disadvantages of the chosen opportunity.
Response to Incentives
Someone will usually be more ‘active’ when someone is getting additional benefits from what they do. For example someone will work according to the portion when his income is fixed, but when there is an incentive then he will work extra than before.
Profitable Trading for All Parties
In this principle, the most highlighted is specialization, for example, a country will produce according to the most optimal capabilities (low production costs, high production capabilities, good quality) owned and sell it to other countries whose production is not optimal from the goods. And production goods that cannot be produced optimally, the country will also buy from other countries whose production is more optimal.
The Market is the Best Means for Coordinating Economic Activities
The market is a place of interaction between producers (companies) and consumers (households) in bargaining the value or price of an item. Producers have the right to determine who will be employed and what goods will be produced, and consumers have the right to work in which company and will buy what goods from the income they can.
The Government Is Able to Improve Production Factors
Economic intervention is usually carried out by the government. Through the market the government can help traders in the market (floor price), so that it can benefit both parties (seller and buyer). Because of this, the seller can maximize income by adding revenue to the goods or trade stock so as to get maximum results.
The Country’s Standard of Life Depends on the Ability to Produce Goods / Services
What can explain the enormous differences between one standard of living and other standards of living in various countries of the world? The answer is quite simple, namely the ability of the factors of production of a country. Countries where workers can produce goods and services in large quantities per unit time, most people live in high standards of living. Vice versa. The relationship is the level of productivity growth of a country determines the average level of income growth.
Printing Large Amounts Of Money Then Prices Will Increase
The high level of money circulation is due to the high production of money, this has an impact on the value of the money will go down. The value of money decreases, the price of goods will rise.
The tradeoff between inflation and unemployment is temporary, but can last for years. In certain countries rising inflation will reduce unemployment. However, this does not appear to be the case in Indonesia.