Significance

• Introductory economics textbooks contain an overview of basic economic principles. These principles explain how individuals make decisions, how economic actors interact with one another, and how economies as a whole work.
  
  

Expert Insight

• Harvard economist Gregory Mankiw articulates 10 basic economic principles in his 2003 textbook, "Principles of Economics." Many colleges and universities use Mankiw's text in their introductory economics courses.
  
  

Individual Decision-Making

• Mankiw's economic principles begin by acknowledging the concepts of scarcity and rational decision making. Scarcity recognizes that people may have unlimited needs or wants, but only finite resources for fulfilling them. This means individuals must make decisions about which needs they pursue and how they allocate their resources, such as time and money, to get what they need.
  Allocating resources among different needs and wants requires people to give up something to acquire something else, such as trading labor for wages or exchanging money for food. Economists such as Mankiw assume that individuals are rational decision-makers who take a particular action only if the benefit is greater than the cost. Mankiw adds that individuals respond to incentives, altering their behavior when the costs or benefits of specific actions change.
  
  

How Economies Work

• Most economists believe that trade benefits all parties involved. Through trade, individuals can specialize in certain activities, and by trading with others, acquire a greater variety of goods and services. This principle extends to trade among nations, as well.
  Economists hold that markets are the best way in which to organize economic activity. By pursuing their self-interest, individuals and firms paradoxically benefit others. Satisfying their own needs requires individuals and businesses to satisfy others' needs. For example, the owner of a small business must keep customers satisfied in order to prosper and meet her own needs for food, shelter and material comforts.
  Although economists prefer that economic activity be organized within markets rather than directed by government planners, they acknowledge a role in the economy for government, especially when the market fails to allocate resources efficiently. When this occurs, government can improve market activity through policies, such as those that regulate pollution.
  
  

Human Interaction

• Three economic principles outlined by Mankiw relate to how people interact with each other in an economy. He states that a country's ability to produce goods and services determines its standard of living. The most productive nations enjoy the highest living standards. Another principle is that when government prints too much money, inflation results, causing prices to increase and the purchasing power of money to decrease. Finally, Mankiw states that there is a short-run tradeoff between reducing inflation and unemployment. Actions to reduce inflation may cause unemployment to rise, if only temporarily.
  
  

Considerations

• It is important to distinguish between economic principles, such as those outlined by Mankiw, and principles of economics. The latter refer to a set of concepts and methods that economists use in conducting economic analysis. These principles apply to the academic field of economics, while economic principles relate to the economy.