5 Basic Principles of Economics

Thinking Like an Economist

Author: PA

  • The Gains from Trade Principle

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    Most economic activities involving more than one person are not “zero-sum games”. They involve trading of some kind. Production without consumption is a waste and consumption without production is impossible. This perspective is not isolated to economics. Marketers encourage firms to adopt a “marketing orientation”, in which a firm seeks a profitable strategy which creates…

  • The Opportunity Cost Principle

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    All important decisions or choices involve a trade off. Thus, any explanation of why somebody chooses one thing must consider the alternative(s) that could have been chosen but were not. Often, opportunity cost in a market economy can often be summarized accurately by using relative prices: if the price of an apple is $2 and…

  • The Comparative Statics Principle

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    Comparative statics analysis is invoked in statements about the effects of differences or when linking cause and effect or when comparing a situation “before” with a situation “after”. Good comparative statics starts by clarifying which variables are “exogenous” (e.g., consumer tastes, production technology and so on) and which variables are “endogenous” (often price or quantity…