10 Principles Of Economics

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what is the 10 principles of economics..? pls give 2 examples for each principles..

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Division of Labor I put the division of labor first mainly because Adam Smith did, arguing that division of labor is the key cause of improving standards of living. Modern economics doesn't do much with the concept of division of labor, but two closely related concepts are important: Returns to Scale Returns to scale may be increasing, constant or decreasing. Increasing returns to scale is the case that leads to special results, and division of labor is one cause (arguably the main cause) of increasing returns to scale. Virtuous Circles in Economic Growth For Smith, a major consequence of division of labor and resulting increasing productivity was a "virtuous circle" of continuing growth. Modern "virtuous circle" theories have more dimensions, but division of labor and (resulting?) increasing returns to scale are among them. Opportunity Cost The idea is that anything you must give up in order to carry out a particular decision is a cost of that decision. This concept is applied again and again throughout modern economics. If (God forbid) you were to learn only one of the Principles of Economics thoroughly, this should be the one. Scarcity According to modern economics, scarcity exists whenever there is an opportunity cost, that is, where-ever a meaningful choice has to be made. Production Possibility Frontier The production possibility frontier is the diagrammatic representation of scarcity in production. Comparative Advantage A very important principle in itself, and a key to understanding of international trade the principle of comparative advantage is at the same time an application of the opportunity cost principle to trade. Discounting of Investment Returns Another application of the opportunity cost principle that is very important in itself, this one tells us how to handle opportunities that come at different times. The Equimarginal Principle This is the diagnostic principle for economic efficiency. It has wide applications in modern economics. Two of the most important are key principles of economics in themselves: The Fundamental Principle of Microeconomics This principle describes the circumstances under which market outcomes are efficient, and The Externality Principle describes some important circumstances in which they are not. Of course, the equimarginal principle is founded on Marginal Analysis Also an important principle in itself and very widely applied in modern economics. There is no major topic in microeconomics (I believe) that does not apply marginal analysis and opportunity cost. The link shown above is the marginal analysis of productivity, but marginal analysis also has applications to cost, revenue, consumers' utility and benefits, and more. Market Equilibrium The market equilibrium model could be broken down into several principles -- the definitions of supply, demand, quantity supplied and demanded and equilibrium, at least -- but these all complement one another so strongly that there is not much profit in taking them separately. However, there are many applications and at least four important subsidiary principles: Elasticity and Revenue These ideas are a key to understanding how market changes transform society. The Entry Principle This tells us that, when entry into a field of activity is free, profits (beyond opportunity costs) will be eliminated by increasing competition. This has a somewhat different significance depending on whether competition is "perfect" or monopolistic. Cobweb Adjustment This might give the explanations when the market does not move smoothly to equilibrium, but overshoots. Competition vs. Monopoly Why economists tend to think highly of competition, and lowly of monopoly. Diminishing Returns Perhaps the best-known of major economic principles, the Principle of Diminishing Returns is much more reliable in short-run than in long-run applications, so the Long Run/Short Run dichotomy is an important subsidiary principle. Modern economists think of diminishing returns mainly in marginal terms, so marginal analysis and the equimarginal principle are closely associated. Game Equilibria Game theory allows strategy to be part of the story. One result is that we have to allow for several kinds of equilibria. We have Noncooperative equilibrium Prisoners' Dilemma (dominant strategy) equilibria which are Nash (best response) equilibria, (but not all Nash equilibria are dominant strategy equilibria), and Cooperative equilibria And that's just the beginning. The main applications in this book, and traditionally, are in the study of oligopoly. Measurement Principles Economics is multidimensional, and that creates some difficulties in measuring things like production, incomes, and price levels. Some of the problems can be solved more or less fully. Value Added and Double Counting One for which we have a pretty complete solution is the problem of double counting: the solution is, use value added. "Real" Values and Index Numbers Since we measure production and related quantities in dollar terms, we have to correct for inflation. Index numbers are a pretty good workable solution, but there are some problems and criticisms. Measurement of Inequality Another issue is that the "average income" may not mean very much, because nobody is average and income is unequally distributed. Even if we cannot correct for that (what would that mean?) we can get a rough measure of the relative inequality and see where it is going. Medium of Exchange Money is whatever is generally acceptable as a medium of exchange. That means a bank, or similar institution, can literally create money, so long as people trust the bank enough to accept its paper as a medium of exchange. We might call this magical fact the Fiduciary Principle. Income-Expenditure Equilibrium Like the market equilibrium principle, but even moreso, this model pulls together a number of subsidiary principles that complement one another and together constitute the "Keynesian" theory of aggregate demand. The implications of this theory are less controversial than the word "Keynesian" is -- controversy has to do more with the details than the applications. Among the subsidiary principles are Coordination Failure The income-consumption relationship The Multiplier Unplanned inventory investment Fiscal Policy The Marginal Efficiency of Investment The influence of money on interest Real Money Balances Monetary Policy The Surprise Principle People respond differently to the same stimuli if the stimuli come as a surprise than they would if the stimuli do not come as a surprise. This new economic principle plays the key role with respect to aggregate supply that "Income-Expenditure Equilibrium" plays with respect to aggregate demand. Rational Expectations People don't want too many unpleasant surprises. If they use the information available to them efficiently, then they won't be surprised in the same way very often. This can lead to Policy ineffectiveness But it is hard to reconcile this way of thinking with the apparent Permanence of many economic changes, especially those in unemployment. These suggest that the economy has a high degree of Path Dependence, and that would put the independence of aggregate supply into some doubt.