The Ten Big Ideas in Economics: Foundations and Principles

The Ten Big Ideas in Economics

What Economics Is All About

Economics is the study of how society manages its scarce resources. Scarcity refers to the limited nature of society's resources, which means that choices must be made about how to allocate them. Economics examines:

• Individual decisions: How people decide what to buy, how much to work, save, and spend.

• Firm decisions: How businesses decide how much to produce and how many employees to hire.

• Societal decisions: How a country allocates resources among competing needs such as national defense, consumer goods, and environmental protection.

The Principles of How People Make Decisions

Idea #1: Tradeoffs Are Everywhere

Every decision involves tradeoffs because resources are limited. Choosing one option means giving up another. Examples include:

• Spending time tailgating before a football game leaves less time for other activities.

• Working longer hours increases income but reduces leisure time.

• Delays in bringing new pharmaceuticals to market may increase safety but also increase costs and delay benefits.

Society faces a fundamental tradeoff between efficiency and equality:

• Efficiency: Achieving the maximum benefit from scarce resources.

• Equality: Distributing economic prosperity uniformly among society's members.

Government policies often involve balancing these two goals. For example, progressive taxation may promote equality but reduce efficiency by discouraging work or investment.

Idea #2: The Cost of Something Is What You Give Up to Get It

Making decisions requires comparing the costs and benefits of different choices. The opportunity cost of any item is whatever must be given up to obtain it.

• For example, the cost of going to college includes tuition, books, and the income you forgo by not working during that time.

People often respond to changes in opportunity cost, even if the monetary cost does not change. For instance, during a recession, the opportunity cost of attending school may decrease because job prospects are lower, leading to increased enrollment.

Example: Opportunity Cost and Student Enrollment

A graph of percentage change in student enrollment (2004-2018) shows that during the 2008-2009 recession, enrollment in higher education increased, reflecting a lower opportunity cost of attending school when jobs are scarce.

Additional info:

• Opportunity cost is a central concept in economics and applies to all decision-making, from individuals to governments.

• Efficiency vs. equality is a recurring theme in economic policy debates.