5 foundations of economics PDF

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Scarcity Economics is the study of how people allocate their limited resources to satisfy their unlimited wants. General principle, ‘if something was free would there be enough to go around.’ Is NOT a shortage (demand is more than supplied)

Five Foundations Of Economics Incentives Matter People respond to positive & negative incentives. An unplanned result of an incentive is generally a negative reaction. When an incentive is established primary effect s what your trying to achieve, but there may be a secondary affected which is unplanned. Life is about trade-offs Scarcity implies choice, and every decision incurs a cost. (cost/time) To want one thing you must give up another. Opportunity Cost Highest valued alternative that must be sacrificed to get something else. Scarcity  Choice  Opportunity cost Value of the trade-off is represented by the opportunity cost. If opportunity cost is the value of the next best alternative not chosen, why is a rejected option important? Answer: Alternatives are still valuable measuring sticks. It is impossible to determine which choice is best without knowing the value of all possible alternatives—especially the highest valued alternative. Opportunity cost also gives a clearer picture of the total cost of a decision. Most people only view cost in explicit terms. In reality, the true cost goes beyond that. With scarcity, we live in a world of trade-offs, and making one decision means earning those benefits but sacrificing the rejected options. Marginal Thinking Is the benefit of 1 more unit of something greater than the cost. Marginal benefits should outweigh the marginal cost. Marginal cost – Marginal benefit = Opportunity cost Trade Creates Value Markets- Bring buyers and sellers together to Exchange goods and services. Trade- The voluntary exchange of goods and services between two or more parties. For a trade to occur both parties have to believe that they will win.

Normative vs Positive Positive analysis is something that’s testable, and is scientifically verifiable, whether its true or false. Normative analysis is an opinion, such as adding “should” in a sentence. A vague statement will always be normative, as it doesn’t contain specific information.

Modelling Models are simplistic, but they can emphasize key concepts, giving a lens into the world. A dependent variable is what’s being explained in an economic model. Ceteris Paribus- Change only one variable at a time. If too many variables changed at a time, hard to tell which impacted the dependent variable. Endogenous factors are those that go into the model and exogenous are outside factors that impact the model.

Production Possibilities Frontier Tells a business what they are capable of making, not what they will actually make. It illustrates the varying amounts of two products that can be produced when both depend on the same finite resources. (technology, capital etc) Demonstrates that the production of one commodity may increase only if the production of the other commodity decreases.

Law of Increasing Relative Cost Not all resources are perfectly adaptable for producing both goods PPF will not have a constant slope. Increasing opportunity cost of production as you produce more of that good. Produce more of pizza, give up increasing large amount of wings.

Specialization and Trade - Allows each party to consume more of a product. Absolute Advantage- Who is better at the production of a good. Comparative Advantage- What is a person best at producing. (lower opportunity cost) happens by specializing in producing one thing n trading it for another.

Consumer vs Capital Consumer good are goods produced for personal satisfaction whereas capital goods are goods used to produce other goods....