Economic Principles

In carrying out our daily economic activities, there are economic principles that we intentionally or unintentionally use as a guide in carrying out economic activities in the fields of production , distribution and consumption .

Then what is meant by economic principles?

Economic Principles is an attempt to get the maximum results possible by making the smallest or minimum sacrifice.

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Understanding Economic Principles

Economic principle is an attempt to produce something with the maximum and at the minimum possible sacrifice. In addition, there are also those who define it as an attempt to obtain satisfaction with certain needs by making the least possible sacrifice with the aim that humans can meet their economic needs in the most effective and efficient way.

Basic economic principle: With minimal costs, get certain benefits, or with certain costs get the maximum benefit.

If we apply the Economic Principles, the benefits obtained are, (1) can optimize profits by getting maximum results. (2) minimize losses due to minimal sacrifice. This economic principle applies in three economic activities, namely production, distribution, and consumption activities.

Aim

From the understanding mentioned above, in broad outline, the principle of economics has a main goal namely, so that humans can meet their economic needs in an effective and efficient way. In addition, there are several other destinations:

  1. To avoid waste in terms of consumption.
  2. To minimize the potential for losses due to certain errors.
  3. To obtain the maximum benefit from economic activity
  4. To be able to use capital and the capabilities it has to its full potential.

Characteristic features 

To better understand economic principles, we must also know what are the characteristics or characteristics of economic principles:

  • Acting rationally, that is someone who carries out activities or actions especially in economic activities must always use healthy not based on emotion and lust.
  • Acting economically, meaning someone in carrying out economic activities using careful calculation and careful planning.
  • Acting sparingly, is someone doing economic activities to avoid waste by buying needs according to what is needed.
  • Make a priority scale, someone in meeting the needs by using the order of needs according to the level of importance from urgent needs to needs that can be delayed.
  • Acting using the principle of cost and benefit, a person in carrying out economic activities must always take into account the costs incurred and the benefits received from the activities carried out.

Type

Based on its activities, economic principles can be classified into 3 types:

  1. In Production Activities

Economic principles in production activities are guidelines for producing as many goods and services as possible using certain production costs and sacrifices.

Examples of the application of economic principles in production activities

    • Opening a place of business that is located close to the location of raw materials, labor or target market areas .
    • Using raw materials that have good quality, but at the lowest price.
    • Use resources efficiently.
    • Using tools and machines with high productivity but at a fairly low cost.
  1. In Distribution Activities

Economic principles in distribution activities are guidelines for systems and activities for the distribution of goods and services from producers to consumers that are effective and efficient. Economic principles in distribution activities focus on promotional or advertising activities, and other marketing activities to get more customers.

Examples of the application of economic principles in distribution activities:

    • Buy goods from major manufacturers to minimize costs.
    • Improving the quality of service to consumers.
    • Using cheap but effective distribution facilities.
    • Offering goods and services that are again trending among consumers.
  1. In Consumption Activities

Economic principles in consumption activities are efforts to obtain maximum satisfaction from an item or service by making sacrifices and using certain budgets.

Examples of the application of economic principles in distribution activities are:

    • Buy good and quality goods.
    • Choose and buy goods that are durable and durable.
    • Buy goods at affordable prices or relatively cheap.
    • Make a list of goods and materials needed as needed.
    • Hold a bargain when buying goods or services to reduce prices.

Economic Principles and Their Explanations

According to N. Gregory Mankiw, there are 10 economic principles that are used in economic activities. Theories of economic principles include matters related to meeting needs, government policies and the role of markets in economic activity.

  1. Everyone Faces Trade-Offs

What are trade-offs ? We can briefly illustrate when we want something, we must sacrifice something else. for example, when we want a quality item, then there must be something we sacrifice to get the item. The sacrifice can be in the form of money, energy, time and so forth.

  1. Sacrificing Costs to Get Something

Sacrificing the cost to get something is often called the opportunity cost . When we make choices, this opportunity can change. Thus we must be able to use the opportunity to get something with better value, or at least in proportion to the costs incurred.

The concept that is often forgotten is the opportunity cost ( opportunity cost ), is a lost opportunity for choosing a choice. So, the price to pay for S1 is not only tuition, books, and living costs. The opportunity costs arising from losing work opportunities with a reasonable salary and should be taken into consideration. So, the opportunity cost to continue studying can be very high.

  1. Think Rationally

When we want to decide on something, of course we use a rational mind. Rational thinking is aimed at making someone understand the advantages and disadvantages of each chosen opportunity. To optimize something both company profits and satisfaction for the household. Because rational people will always consider marginal change, change occurs because of small changes.

An example of marginal profit is the change in profits that we get from the extra sale of one item or service. Generally, people will compare marginal benefits with marginal costs when making decisions.

  1. Response to Incentives

Usually, humans will be more ‘active’ when they get more profit from the things done. For example, when someone is given an incentive to work harder then he will take the opportunity to get intensive.

  1. Profitable Trading for All Parties

This principle is a principle that emphasizes specialization. For example a country produces goods or services based on the best capabilities it has (good quality, high production, low production costs). Then sell these products to other countries where the production is not optimal for the goods. “Countries whose production is not optimal will buy or import goods from countries whose production is optimal.”

  1. Market as the Best Place in Economic Activities.

The market is a place of buying and selling goods between sellers (producers) and buyers (consumers). In this case, the producer has the right to determine who is employed also what goods are produced. Whereas consumers have the right to work in companies also buy the goods they want from their income.

Market mechanism is the right method to regulate economic activity. One of the weaknesses of a centralized economy is that there are not enough incentives to go forward and do more. On the other hand, market mechanisms rely on the collective decisions of households as well as companies in allocating resources. The market raises the demand for goods or services. It is also the market that brings companies and households together by offering offers.

  1. Government Can Improve Production Factors

The government can increase factors of production such as intervening in the economic field. This can be done through the market by helping traders in the market so that it can benefit both the seller and the buyer. These government interventions can help sellers optimize their income by adding goods or trading stock.

  1. Country’s Living Standards Depend on Ability to Produce Goods / Services

The ability of the factors of production of goods and services determines the standard of living in a country. Countries where workers produce goods and services in units of a certain amount and unit of time, most people live in high standards of living. Vice versa. Can be interpreted, the level of productivity growth of a country largely determines the level of average income growth in the country.

What factors determine a country’s standard of living? Productivity, the number of goods and services produced per hour of work. The concept of productivity and standard of living of this country will also have an impact on public policy. Then how to increase community productivity? The answer is that good education is needed , adequate facilities and infrastructure, appropriate policies and qualified technological support.

  1. Inflation Occurs When The Government Makes Lots of Money

The amount of money in circulation in the community will affect the value of a country’s currency . If the money supply is high, the value of money will decline. This will cause inflation in the country.

  1. The Community Faces Short-term Trade-Off Between Inflation and Unemployment

The trade-off between the amount of inflation and unemployment is temporary, but this can also occur over a period of years. Interestingly, there are several countries that experience inflation but instead make the unemployment rate decline in the country.

Although in the long run inflation is the main effect of the money supply, in the short term printing a lot of money can actually reduce unemployment. How is the flow? The increase in the money supply can encourage spending capacity so that the number of requests also increases. The increasing number of requests will attract entrepreneurs to increase the production of goods and services to meet these demands.

So that more workers are needed and open up jobs so as to reduce the number of unemployed. So, from the scale of the whole economy there is also a trade-off (trade off), namely between inflation and unemployment.

 

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