Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited needs. This is a study of how people make choices.
- If a student decides whether to buy a textbook for a particular class, he has to think about some issues. He has a limited amount of money. He can spend money for something else, or even for a textbook for another class. He has to evaluate the best choice, the one that will fulfill his needs the most.
- If government officials raise taxes, people will have to pay more taxes, and they will have less money for themselves. As a result, people may protest against tax raises and become dissatisfied with the government's policy. However, the budget will get more money, and they will be allocated for some other projects and needs. Consequently, people will pay indirectly for some government projects.
- The hotel wants to build a stadium to increase revenues. The hotel gets its funding from the budget, and it wants to build a new stadium. Limited budget funds may be or may not be allocated for a new stadium. Municipal authorities have to evaluate the possible usefulness of a new stadium and make a choice whether to give needed funding to the hotel. They may spend this money for other purposes, so they have to choose.
Health care is a very interesting issue for the economic way of thinking. Much money from the budget is spent on health care. People pay taxes, and instead, they can be sure that if something happens, an ambulance will come, and they will get help. It is obvious that some people receive more services if they are sick, and others receive less as they are healthy, though all of them pay equally. However, if money is not spent on health care, the consequences will be devastating. If some natural disasters occur, and there is no centralized health care system, there will be many victims and deaths. The model involving health care on an individual basis includes the following: 1) each individual pays for health services depending on how many services he needs; 2) each individual chooses health care professionals; 3) each individual chooses when he needs some health care services.
Economics assumes that all resources are limited, and all wants are unlimited. Consequently, this applies to all subjects of the economy, from the poorest to the richest. Wants are unlimited, and most households do not have enough resources to fulfill them. However, there are billionaires, who can afford everything they want. That is why "limited resources" may not apply to them. However, even if the household is very rich, there is a limit to its wealth, though it is very high and even unreachable.
Macroeconomics has a general meaning, as it studies the behavior of the economy as a whole, while microeconomics deals with decision-making undertaken by individuals or firms.
- Macroeconomic issue.
- Microeconomic issue.
- Not an economic issue, though it has an impact on the economic situation of a household.
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Sally does everything she wants to do. Though these activities do not make money for her, she may expect to get something in the future. Indeed, during volunteering activities, she meets new people, makes contacts with them, and simply makes good things. If she is involved in the extracurricular sport, she expects to be fit and healthy, for example. Consequently, she is quite rational and thinks about her future. Though studying is her major activity, she gets useful from other activities. Furthermore, Sally would not do anything that makes her harm.
Rationality assumption states that individuals do not make decisions, which will make harm them. It assumes that people are always considering different decisions, and choose the one that is the best for them. However, some economists claim that people are usually driven by other than economic incentives, such as emotions, physical, and psychological state, and thus their decisions may be unpredictable and harmful for themselves.
Bounded rationality assumes that individuals have limited information and some characteristics of the way they think. Consequently, their decisions may sometimes be not completely rational, but rather strange and irrational. Thus, there is a phrase that they may use as a rule of thumb while making their decisions.
People may follow rational behavior, but due to lack of information, they may use the rule of thumb to make their decision. Furthermore, if an individual has two or more options with the same or almost equal outcomes, it is possible to choose one of the decisions using the rule of thumb.
- This prediction follows the model. Myrna spends additional time studying, and this increases her chances to get better marks.
- This prediction does not follow the model, because Leonardo uses the rule of thumb. He should purchase an expensive business suit to increase his chances to get the job.
- This prediction follows the model. If Celeste can earn additional money, she will buy DVD, and she will still have enough money to pay for her room and board at college.
- The second model is based on the rationality assumption. Economists know that voters have every incentive to get higher final payment, and they will vote in a way that will cause better rewards.
- The economists would choose the second model because it is based on rationality assumption.
In contradiction to positive economics, normative economics usually involves subjective and moral judgments.
- Positive economics.
- Normative economics.
- Huge sales of tablets will decrease the price of laptops.
- Falling hotel prices will result in a decrease in vacation travel.
- The introduction of minimum wages will result in fewer people working.
Stock market investors are very rational in deciding what stocks to choose. They invest in the companies, which show good results, and they earn money. If they were irrational, they would not have profit. Consequently, they buy stocks, increase their price, and make a profit.
The PPC does not show the law of increasing relative cost, because it is a straight line.
The opportunity cost for the student to move a grade in economics from 90 to 100 is 50-40=10. An increase of 10 points in economics can be achieved with a decrease in 10 points in biology. This proves that there is no increasing relative cost.
The PPC shows the law of increasing relative cost because it is not a straight line. The opportunity cost for the student to move a grade in economics from 60 to 70 is 93-85=8. An increase of 10 points in economics can be achieved with a decrease in 8 points in biology. The opportunity cost for the student to move a grade in economics from 90 to 100 is 60-40=20. An increase of 10 points in economics can be achieved with a decrease of 20 points in biology. This proves that there is an increasing relative cost.
Assume, this is the PPC for the country.
- If a new fertilizer is invented, the country can produce more food.
- If immigration occurs, the country will be able to produce more both food and video games.
- If a new technology is invented, the country will be able to produce more video games, because their cost will decrease.
- If there is a heatwave and drought, the country will reduce its food production by 10%.