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Six Fundamental Principles of Economics Learning economics gives people a better understanding of the economic and financial realities around them, improving their ability to save, invest, produce, consume, and even vote. These key principles are true to all areas of economics, but could be applied uniquely, depending on the specific circumstances. Here are the six basic principles of economics: 1. Scarcity forces people to make choices.
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According to economists, scarcity is innate in the world we live in. With this, they mean that available useful resources will never be sufficient for people’s desires and necessities. Hence, they always need to select from competing choices. For example, they have to decide whether to spend all of their scarce income or save some for the rainy days.
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2. Every choice comes with an opportunity cost. Each time a consumer or producer or an investor or saver decides, an alternative action is always available. Economists refer to the forgone choice as the opportunity cost of a decision. In decision-making, the value of the opportunity cost should be taken into account. To illustrate, when a person decides to save $100 of his after-tax income, he is giving up goods and services worth that amount, and that is the opportunity cost of his decision to save. 3. The response of people to incentives is predictable. An incentive is something that affects the choices people make. If there’s a change in incentives, people’s actions are also likely to change in predictable ways. For instance, a rise in real interest rates offers the incentive to save more and spend less. 4. People’s choices are shaped or affected by market forces and economic systems. People’s financial decisions are made within the framework of an economic system. In particular, the type of economic system – command, market, traditional or any combination – plays a huge part in the choices they make. As an example, people in a strict command economy, such as in North Korea, where majority of properties are government-owned and controlled, people do not have the liberty to make stock market investments. 5. People’s choices lead to intended and unintended future consequences. According to economic experts, the costs and benefits of our decisions – intentional or unintentional – reveal themselves in the future, as this is the only time we can influence or affect. For example, a government may put a cap on gasoline prices to help consumers; however, this can lead to the unintended result of black markets, long lines at the pump, etc. 6. People gain from trading voluntarily. People do not make all the goods and services they need. Sometimes, they make less products and services and then exchange them with others as a way to satisfy their economic desires or necessities. A person who works for a company, for instance, gains from his salary and employment benefits; in turn, the company also gains from the work he provides.