15 basic economic principles that you should know

This test gave children to option to eat a single marshmallow or wait a set time and receive extra, testing their ability to withdraw from instant gratification.

This psychological experiment showed that children who could delay gratification (wait for a larger reward) tended to have better life outcomes, including higher incomes. (Results are still being disputed)

This economic principle states that as a person consumes more of a good or service, the additional satisfaction (utility) from each additional unit decreases.

The broken window fallacy is a misconception that a destructive event, such as breaking a window, has positive economic effects because it creates job opportunities for those who fix it. In reality, it only causes a redirection of resources away from productive activities.

👉 Destruction does not create wealth. 👉 The resources used to repair the window could have been invested in more beneficial activities, ultimately leading to economic growth and job creation. 👉 Remember, every decision has an opportunity cost. Don't fall for this fallacy and always consider the bigger picture!

Named after economist Ronald Coase, this theorem states that under certain conditions, private parties can reach efficient outcomes without government intervention, through bargaining and negotiation.

These are goods that people consume more of as the price rises, contradicting the law of demand. They are rare and typically involve essential items for which no substitute is available.

This concept describes how individuals acting independently and rationally according to their own self-interest can deplete a shared resource, even when it’s against everyone’s long-term interest.

Developed by The Economist magazine, this index compares the price of a Big Mac burger across different countries as a way to gauge purchasing power parity and currency valuation.

A game theory scenario where two rational individuals might not cooperate, even if it is in their best interest to do so, due to mistrust and the risk of being exploited.

This curve illustrates the relationship between tax rates and tax revenue. It suggests that at some point, increasing tax rates beyond a certain threshold can lead to a decrease in revenue due to disincentives for economic activity.

Named after economist Thorstein Veblen, this effect describes how the demand for a good increases as its price increases, primarily because it serves as a status symbol.

this goes against the common understanding of pricing according to supply and demand.

this fallacy describes the belief that a person who has experienced success in the past is more likely to have continued success in the future, despite the outcomes being independent.

In economic decision-making, this cognitive bias refers to people overestimating their knowledge or abilities in a particular area, often leading to poor decisions.

Named after a study conducted at the Hawthorne Works factory, this effect refers to the phenomenon where individuals improve or modify their behavior when they know they are being observed, which can skew experimental results.