CHAPTER 1 The Core Principles of Economics

Every economist starts out right where you are.

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Chapter Objective

Learn the four core principles that provide the foundation of all economic analysis, and use them to analyze choices and make better decisions.

• 1.1 A Principled Approach to Economics

  Understand economics as a way of thinking, grounded in a set of broadly applicable principles that you’ll find useful “in the ordinary business of life.”

• 1.2 The Cost-Benefit Principle

  The Cost-Benefit Principle: Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.

• 1.3 The Opportunity Cost Principle

  The Opportunity Cost Principle: The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.

• 1.4 The Marginal Principle

  The Marginal Principle: Decisions about quantities are best made incrementally. You should break “how many” decisions down into a series of smaller, or marginal, decisions.

• 1.5 The Interdependence Principle

  The Interdependence Principle: Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change.

I remember sitting where you’re sitting—in an introductory economics class—a few years back. (OK, quite a few.) I didn’t exactly know what to think about the subject, or where it would lead me. I felt one part excitement, and two parts trepidation. Ultimately that class changed my life. It provided me with an approach to thinking that is both broad and powerful. It gave me a new lens through which I could understand the world. It provided clarity and insight. And above all, it was useful. I’m not exaggerating when I say that not a day goes by when I don’t use the tools I learned in that introductory class. Learning economics was the best investment I ever made.

While some parts of that class came naturally, other parts seemed unnecessarily complicated. And so I kept studying economics in order to master these complexities. But a funny thing happened along the way: The more I studied the subject, the more I came to understand that, in fact, economics isn’t all that complicated. Sometimes economists just make it sound complicated.

I learned that economics is just a small set of ideas—or principles—that you can apply over and over. It took me a decade to fully understand the power and reach of these principles. But it needn’t take you that long. That’s why I wrote the book that you’re reading right now: I want to teach you these powerful principles, and I want you to learn how to use them. I believe that everyone can benefit from the clarity that economic tools bring. And I hope that by the end of this chapter, you’ll have mastered what it took me so long to learn: That economics is built upon four core principles that can be used to provide insight into just about any problem that’s worth thinking about.

I invested much of my adult life learning this, and I still reckon it was worth it. For you, it’s just one chapter, so it’s a much better investment. So let’s dig in.