1.1 Economic Principle

• Define Economics 

  • Identify the tenets of the economic way of thinking

  • Apply marginal analysis in economic decision making

  • Understand the concept of opportunity cost

 1.1 Economic Principle Notes

Define Economics: Economics is the social science that studies the production, distribution, and consumption of goods and services. It analyzes how individuals, businesses, and governments make choices in allocating scarce resources to satisfy their wants and needs. Economics is divided into two main branches: microeconomics, which focuses on individual decision-making units, and macroeconomics, which studies the economy as a whole.

Identify the Tenets of the Economic Way of Thinking: The economic way of thinking is characterized by several key principles:

1. Scarcity: Resources are limited, and choices must be made due to scarcity.

2. Choice: Individuals, businesses, and governments must make decisions about resource allocation.

3. Opportunity Cost: Every choice involves giving up the next best alternative.

4. Incentives: People respond to changes in costs or benefits.

5. Marginal Analysis: Decisions are made at the margin, considering incremental costs and benefits.

6. Market Forces: Markets play a crucial role in allocating resources through supply and demand.

7. Rational Behavior: Individuals are assumed to make decisions to maximize their utility.

8. Interdependence: Economic decisions have interconnected effects on different parts of the economy.

9. Time Value of Money: Money has different values at different points in time.

10. Efficiency: Economies strive for optimal resource allocation to achieve maximum satisfaction.

Apply Marginal Analysis in Economic Decision Making: Marginal analysis involves evaluating the additional or incremental costs and benefits of a small change in a particular action. In economic decision-making, individuals and businesses compare the marginal cost of an action with its marginal benefit. If the marginal benefit exceeds the marginal cost, it is considered rational to undertake that action. Conversely, if the marginal cost exceeds the marginal benefit, it may be advisable to avoid that action. Marginal analysis is essential for optimizing decisions, especially in situations where resources are scarce.

Understand the Concept of Opportunity Cost: Opportunity cost is the value of the next best alternative forgone when a decision is made. It represents the trade-off involved in choosing one option over another. In economic terms, opportunity cost is the cost of not choosing the next best alternative. To illustrate, if an individual decides to spend money on a concert ticket, the opportunity cost is the value of what could have been purchased with that money instead, such as a dinner at a restaurant or a new pair of shoes. Understanding opportunity cost is crucial for making informed decisions, as it reflects the true cost of choices in the context of scarcity.