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5 Economic Principles

The following article has been adapted from FME Articles, a partner organization of Finance OneforOne. To read a longer version of this article, click here

The following economic principles have not been discussed in our "Scarcity and Choices" article. Read it here to learn more about economic principles.

1. Marginal thinking evaluates the cost of “one more” unit.

Marginal thinking is when people evaluate whether the benefit of “one more” unit is greater than the cost. When running a business, marginal thinking is especially advantageous because it allows one to decide whether something is worth investing in or not. ​For example, if a business wants to produce 1 more t-shirt but it requires a new factory to be purchased, the business must evaluate whether the benefit of the 1 t-shirt is greater than the expense of the factory. ​ Besides businesses, marginal thinking is used by everyone because it allows people to deduce if a decision is the most profitable possible. ​

2. Markets are the best way to allocate resources between producers and consumers. Markets efficiently organize the economy.

Markets are vital because that is where buyers (consumers) and sellers (producers) interact. Without markets, there would be no purchases; hence, there would be no economy. No one is obligated to do anything in markets; consumers are free to buy whatever they want and producers are free to sell anything they want. ​

3. Government intervention in markets alters the way markets naturally operate.

Government intervention is based on certain circumstances and is crucial to an efficient economy. The government can set rules about how workers and businesses operate, or it can regulate what types of products can be bought or sold, by whom, or for what prices. For instance, if the price of a good is unreasonably high, the government can enforce a price ceiling to lower the price. ​

4. Trade

Trade benefits all parties involved when it is voluntary. Voluntary trades contribute to a better economy and create wealth because parties will only participate in trade when they expect to benefit from it. Although it may seem like only individuals benefit from trade, the invisible hand concept shows that the economy benefits as a whole.

5. Specialization

Producers and nations specializing is propitious because it drives production efficiency, which generates more wealth. If producers wish to operate at full capacity, they must ensure that their employees are specialized in the area they work in. This will allow more work to be done in less time. Individuals must also recognize the importance of specialization and focus working on what they are best at. When everyone works at what they are best at, production is maximized, which allows the businesses to be more wealthy; hence, the employees also get higher wages. ​ Specialization is often known as division of labor because when labor is split and assigned to those who are best at it, productivity reaches its peak.

Read 5 more economic principles with FME Articles. (10 Basic Economic Principles)

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