In economic activities, there are ten fundamental principles upon which all complex economic analyses are built.

Principle 1: People face trade-offs

Often when making decisions, we need to choose between one goal and another. For individuals, this might mean deciding how to allocate income to purchase food, clothing, or travel, which often requires a balancing act.

For society, there is a trade-off between efficiency and equity. Efficiency refers to the size of the economic pie, while equity refers to how the pie is divided. There will be sacrifices between these two, and a balance must be found.

A classic trade-off is between "guns" and "butter." When a society spends more on defense, there is less expenditure on consumer goods that improve the standard of living domestically.

Principle 2: The cost of something is what you give up to get it

The opportunity cost of something is what you forgo to obtain it.

For example, what is the opportunity cost of going to college? You might think that the sum of tuition, books, room, and board is the opportunity cost of attending college, but that's not entirely accurate.

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For most students, the income they have to forgo to attend school is the opportunity cost of their education. Even if you leave school, you still need a place to sleep and food to eat. Only if the cost of accommodation and meals at university is higher than elsewhere can the difference be considered part of the opportunity cost.

Principle 3: Rational individuals consider marginal quantities

Rational people think at the margin.Economists typically assume that individuals are rational. Rational individuals often make decisions by comparing marginal benefits with marginal costs. A rational decision-maker will undertake an action when the marginal benefit of that action exceeds the marginal cost.

For example, suppose an airplane is about to take off with ten empty seats, and passengers waiting at the boarding gate are willing to pay 300 yuan for a ticket. Should the airline sell to them?

Certainly, they should. Although the airline's cost for each seat is 500 yuan, adding one more passenger only incurs an additional cost of ten yuan for drinks and snacks, which is equivalent to a marginal cost of ten yuan per empty seat, while the marginal benefit is 300 yuan. Since the marginal benefit exceeds the marginal cost, it is a profitable decision.

Principle 4: People respond to incentives.

Incentives refer to something that prompts a person to take a certain action.

For instance, in the United States and the European Union, the U.S. has a low gasoline tax, while the EU has a high gasoline tax. Europeans respond to this high gasoline tax incentive by driving smaller cars, using more new energy vehicles, utilizing public transportation more frequently, and choosing to work closer to their homes.

Principle 5: Trade can make everyone better off.

If a person is isolated, they would need to grow wheat, make clothes, and build houses on their own, which is very inefficient. By engaging in trade and cooperating with others, each person can focus on the activities they are best at, thus acquiring a variety of goods and services at a low cost, which is a win-win situation.

Principle 6: Markets are usually a good way to organize economic activity.

For example, compare planned economies with market economies.Planned economy is a highly centralized system where resources are allocated through singular decision-making, and the prices of goods are controlled by the government. This leads to low price flexibility, slow response, and difficulty in properly guiding economic activities.

Market economy is a decentralized system where decisions are made by each market participant to allocate resources. Prices can adjust spontaneously, respond quickly, and act like an invisible hand, thus promoting overall economic development and the maximization of social welfare.

Principle 7: Government can sometimes improve market outcomes

Although the invisible hand of the market is powerful, government involvement is still necessary to improve market outcomes. The reasons are as follows:

1. The need for the government to establish rules. For instance, implementing property rights guarantees the rights of market producers. With this framework in place, the market can operate normally.

2. The need for the government to promote efficiency. Sometimes the government needs to intervene in the market to control market failures caused by externalities or market forces, such as antitrust actions, in order to improve economic efficiency and grow the economic pie.

3. The need for the government to promote equality by enacting public welfare policies, achieving more equitable economic distribution, and reducing wealth disparities.

Principle 8: A country's standard of living depends on its ability to produce goods and services

The standard of living of a nation's citizens depends on the country's level of productivity. The higher the productivity of a country, the higher the average standard of living, and they are positively correlated.

Principle 9: When the government issues too much currency, prices rise.This is inflation, which refers to the rise in the overall level of prices in the economy. When the amount of money increases, the value of money decreases, leading to the need for more saved money to purchase the same item, which is also an increase in prices.

Principle 10: Society faces a short-term trade-off between inflation and unemployment.

Governments often issue more money to stimulate the economy. Although this can lead to currency devaluation and rising prices, or inflation, in the long term, it also results in a beneficial short-term effect. The injection of money increases the overall level of spending in society, which increases the demand for goods and services. This encourages businesses to expand production and hire more people, thus reducing unemployment. Therefore, society needs to make a trade-off between long-term inflation and better short-term employment. It is about finding a balance.

Remember these basic principles, even the most complex economic analyses are built upon these ten principles.