Module 1: General Economic Principles Economics Social Science Optimal efficient location and distribution of scarce resources to satisfy unlimited human wants and needs Economic Principles People Face Trade-offs The cost of something is what you give up to get it Rational People think at the margin People respond to incentives Trade ccan make everyone better off Markets are usually a good way to optimize economic activity Governments can sometimes improve market outcomes A country’s standard of living depends on its ability to produce goods and services Prices rise when the government prints too much money Society faces a short-run trade-off between inflation and unemployment Key Terms Scarcity: Shortage Tradee-offs: A balance between two best incompatible features Opportunity cost: Potential benefits one misses out when choosing an alternative Branches of economics: Macroeconomics: Economy as a whole Microeconomics: Study of individual, household, and firm’s behavior in decision making Economics as Policy Adviser Scientific Method Roles of Assumptions Economic Models Economics as Scientist Postive vs Normative Analysis Economic Policy is a Messy Affair Why Economists disagree Difference in Scientific Judgements Difference in Values Perception vs. Reality Consumption Function Income increases, consumption also increases Consumption does not reach 0 Illustrates the positive relationship between income and consumption Even if there is no income, there will always be a consumption Economic Equations QD= 10-P QS= -5+2P Four Fundamental Economic Questions What to produce How much to produce How to produce For whom to produce?
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